Cryptocurrency is a digital or virtual asset that relies on cryptography to verify and secure transactions. Most cryptocurrencies have no central regulatory authority (i.e., the federal government), but rather run on decentralized systems through the use of blockchain technology to record transactions and assign new “tokens.” While blockchains provide a high sense of security and self-regulation, they are not risk-free. The insurance market has been slow to enter the cryptocurrency world, but some insurers have, and others are starting to explore this new terrain. In this blog, we provide a short overview of what you should know about cryptocurrency insurance in order to decide whether it’s right for you and/or your company.
1. Cryptocurrency Insurance Does Not Protect Against Depreciation; But Rather Mishaps Like Transaction Issues and Theft
Similar to stock investments, there is no insurance against the possible loss or depreciation in the value of your cryptocurrency. Investments go hand in hand with significant risk so insurance companies are not eager to insure such activity. Instead, the available cryptocurrency insurance protects against unexpected occurrences such as transaction failures and theft, which can be just as devastating and often times more abrupt than plunges in the market.
One of the benefits of cryptocurrency is that it removes the middleperson (i.e., banks and other lenders) from transactions. This can increase both transaction speeds and remove fees. But sending digital currency is still an innovative technology that can be plagued with its own set of issues like irreversible transactions, human error, and software bugs. Once cryptocurrency leaves your digital wallet, you can consider it gone for good regardless of whether the intended recipient received it or not.
Thefts and hacks are also common misfortunes associated with cryptocurrency. In 2014, Mt. Gox, once the world’s leading bitcoin exchange, lost more than $450 million worth of bitcoins after an alleged insider stole the coins directly from Mt. Gox’s wallet. Whether a hacker accesses your digital wallet, or a thief intercepts your transaction, it’s difficult to trace where your coins end up and who to blame. Because of this difficulty, cryptocurrency thefts and hacks are often not reported or left unresolved.
If you obtain the right type of coverage, however, you or your company can protect your cryptocurrency from the increasing risk of thefts and hacks.
2. Ensure You Obtain the Right Coverage
Insurance companies do not always offer the same type of protections for your cryptocurrency investments. It’s therefore important to understand what your policy covers―transactions, thefts, both? Talk with your current insurer or a trusted broker and see whether they offer cryptocurrency insurance and, if so, the type you need. If they do not, they can often recommend an insurance company that does.
It’s possible homeowner insurance covers cryptocurrency mishaps. There is at least one case, Kimmelman v. Wayne Ins. Group, 18-CV-1041 (Court of Common Pleas, Franklin County, Ohio Sept. 25, 2018), where the court found bitcoin was “property” under the applicable homeowner’s insurance policy, as opposed to money that had a significantly lower coverage limit. Courts, however, are still deciding how to handle cryptocurrency claims, and in light of very little precedent you should not assume your cryptocurrency is covered by your homeowner’s policy.
You should also consider coverage limits when buying cryptocurrency insurance. If you have substantial cryptocurrency, or plan to increase your assets, consider also increasing your limits.
3. Cryptocurrency Investing Success Increases the Need for Specialized Insurance
Investors that own between 1,000 and 1 million bitcoins are often referred to as whales or high-net-worth (HNW) individuals. These HNW individuals hold more than 40% of the bitcoin market and are the ones who could benefit the most from buying specialized insurance to protect their investments.
With that said, cryptocurrency is becoming more mainstream, and non-HNW individuals may also be interested in protecting their cryptocurrency assets. This increased interest not only encourages insurers to venture further into the world of cryptocurrency protections, but also to offer its coverage at premiums that non-HNW individuals can afford.
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The world of cryptocurrency is constantly growing and evolving and other markets, like insurance, are starting (or continuing) to take an increased interest. As cryptocurrency starts to become more mainstream, more insurance companies will likely become players. This will likely make cryptocurrency insurance accessible to both HNW and non-HNW individuals.