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What Is a Bitcoin Insurance Policy?

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bitcoin insurance feature
Image Credit: @martenbjork

Your Bitcoin is valuable. When the price of Bitcoin rises, its value increases further. In addition to its value, Bitcoin is also a desirable target for thieves. It is easy to hide, completely digital, and almost untraceable.

It stands to reason that Bitcoin insurance products are appearing. You insure your house, your car, maybe your laptop and smartphone, too. So, can you insure Bitcoin? And what Bitcoin insurance policies are available?

What Is Bitcoin Insurance?

Bitcoin insurance is an insurance policy that protects your cryptocurrency holdings against a range of issues, predominantly theft.

In cryptocurrencies short existence, thousands of breaches and even more hacks have robbed users of their Bitcoin and other tokens. Most of the time, there is very little a user who falls foul of fraud can do. Once the cryptocurrency is stolen, you cannot compel the holding account to give it back. Sure, there are some ways you can track Bitcoin transactions, but without serious investigative tools, you won’t find the thief.

Back to the Bitcoin insurance.

There are two main questions surrounding Bitcoin insurance. The first is “Can you get a personal Bitcoin insurance policy?” Is it possible to insure your Bitcoin and cryptocurrency stash? The second question relates to cryptocurrency exchanges and their security. If an exchange suffers a breach, does the exchange have insurance to cover the losses? If so, would you even receive any compensation for your stolen cryptocurrencies?

Cryptocurrency Exchange Insurance Policies

Let’s look at the second question first. Is your cryptocurrency insured while it rests on an exchange? Aside from the fact you shouldn’t leave your cryptocurrency on an exchange for too long (in case of a breach, outage, exit scam, or otherwise), cover varies between exchanges. Understandably, many cryptocurrency exchanges don’t disclose the fine print of their insurance policies. There is, however, one notable exception.

Coinbase published a comprehensive overview of their crypto insurance program. Coinbase vice president of security, Philip Martin, confirmed that the exchange has $255 million cover for cryptocurrencies held in a hot wallet. Coinbase holds less than 2-percent of its customer’s tokens in a hot wallet at any one time. The remaining 98-percent is held in cold wallets, which are much harder to breach.

It also makes it extremely clear that “if the worst happens and Coinbase loses customer funds, customers deserve certainty that they will be made whole.” It is an encouraging stance from the largest Bitcoin on-ramp service. The article also notes that Coinbase has had an active cryptocurrency insurance policy since 2013.

Need a Coinbase account? Sign up using the Blocks Decoded link and you’ll receive an extra $10 after your first $100 worth of trading!

Cryptocurrency Insurance Policy Types

Philip Martin’s post also elaborates on the two main forms of cryptocurrency insurance an exchange can use.

Specie policies focus on the “physical damage or loss of private keys” from cold storage. Theft from offline cold storage is rare. Martin believes that a specie policy would not cover hacking or a blockchain failure leading to the loss of private keys.

Whereas, crime policies focus on hot wallet loses and unlike Specie policies, do include coverage for hacking, insider theft, fraudulent transfers, and other breaches.

In late 2018, an unnamed source told Coindesk that cryptocurrency crime insurance policies account for less than $1 billion and is probably “in the vicinity of $750 million.” Whereas the species cryptocurrency market was worth somewhere between $3 billion to $5 billion, for a combined size of around $6 billion.

Cryptocurrency Exchange Insurance Policy Prices

Cryptocurrency insurance for an exchange doesn’t come cheap, either. Cryptocurrencies are volatile. They’re also an attractive target for criminals. Therefore, insurance policies for cryptocurrency exchanges are high. High enough that smaller exchanges and trading platforms simply cannot afford the additional expense.

Ty Sagalow, chief executive of Innovation Insurance Group LLC, which has been developing cryptocurrency insurance products since 2013, confirms the issue, saying “It’s an expensive product that many companies can’t afford.”

The annual premium for $10 million in theft coverage would cost around 2-percent of the limit—around $200,000.

The eye-watering prices are understandable. An insurance policy in January 2017 for $10 million covered over 10,000 Bitcoins. A year later, with Bitcoin at its all-time high? That coverage would have only extended to around 900 Bitcoins. That volatility and uncertainty make insuring large quantities of cryptocurrency problematic for even the largest insurance firms.

Personal Bitcoin Insurance Policy

I won’t beat about the bush. You are unlikely to encounter a personal Bitcoin insurance policy if you are holding a thousand bucks worth of tokens. Your homeowner’s policy is extremely unlikely to offer cryptocurrency cover. You might find a personal cybercrime insurance policy that offers Bitcoin or cryptocurrency policy extension.

The reality is that a Bitcoin or cryptocurrency insurance policy is expensive, and the vast majority of people cannot afford such an expense.

That’s not to say that a personal Bitcoin insurance market won’t appear in the future. Remember, cryptocurrencies are young. Adoption is still low. (Here are 15 companies that accept Bitcoin as payment though!) Insurance firms thrive on data, mountains on the stuff. Because there is very little past cryptocurrency insurance policy data, insurance firms are unable to conduct established forms of market analysis. Therefore, where policies exist, premiums are high.

Your best bet is using a major exchange that offers coverage for its own products. You have already read about Coinbase. But Gemini accounts are also insured up to $250,000. Furthermore, Binance maintains an in-house fund that acts as a stopgap in the event of a breach or otherwise.

Cryptocurrency Security Is Better Than Bitcoin Insurance

There’s no guarantee that the cryptocurrency insurance product you’re interested in will last, either. Some products have already come and gone.

Elliptic’s Vault was an insured Bitcoin storage service backed by Lloyd’s of London. The insured cryptocurrency storage service launched in early 2014. But by June of the same year, the relationship between Elliptic and Lloyd’s deteriorated and the budding Vault Bitcoin storage service, hailed by some as a milestone for cryptocurrency, disappeared overnight.

At the current time, you’re better off investing time into learning how to better protect your cryptocurrency portfolio from theft, fraud, or otherwise. Start by checking out the seven most secure Bitcoin and cryptocurrency wallets. Afterward, give Joe’s guide on how to store your cryptocurrency in an offline wallet a read to maximize your security.

Gavin Phillips
Gavin saw the potential in Bitcoin back in 2010, but was a dirt poor student living on eggs and without a penny to invest. Since then, he’s been tracking the development of cryptocurrency and blockchain, and he’s written about blockchain for several publications and ICO whitepapers, including Envilope.
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