Demand for cryptocurrencies is booming, as more than 40 million people worldwide use some type of them, according to SaaS Scout Research Group.
As with any financial asset with value, cryptocurrency owners need protection with their investments, and that’s where cryptocurrency insurance enters the picture – at least on a limited basis in early 2021.
“There’s only a handful of insurers either currently offering cryptocurrency coverage, with insurance broker Aon claiming to own 50% of the business-to-business market,” said Virginia Hamill, senior insurance analyst at FitSmallBusiness.com “Approximate estimates for cryptocurrency insurance capacity stands at between $1 billion and $6 billion, for a market that’s valued at around $1 billion.”
The complicated nature of a decentralized trading environment also gives insurers pause, especially in a global trading platform that operates in a wild west environment.
“The cryptocurrency insurance sector is relatively small but complex,” said Savanna Bilbo, a consultant at Pelicoin, a Bitcoin ATM service. “Bitcoin and other cryptocurrencies are unregulated by the government, which means there are no rules for insuring. The price of cryptocurrency fluctuates day-to-day, which makes it difficult and expensive to insure.”
It’s tough to pinpoint exactly what to expect in a highly volatile cryptocurrency market, but industry experts seem to agree on a few key themes in early 2021.
Prices could rise, and demand, too.
By the end of 2021, Bilbo said Bitcoin, the largest cryptocurrency, could be priced as high as $100,000 (it traded today at about $49,000).
“Large mainstream companies will likely start purchasing Bitcoin and other cryptocurrencies and accepting them as forms of payment,” Bilbo said. “When this happens, the world of crypto will see a significant change, with demand for financial protection rising.”
Crime and fraud are up-front insurance issues.
Currently, the cryptocurrency crime and fraud sector are seeing the highest insurance costs.
“Millions of dollars of cryptocurrency have been lost every year due to corruption and fraud,” Bilbo said. “There are many ways to hack or defraud cryptocurrency owners, and many feel the need to insure their cryptocurrency any way they can. Thus, insurance interest is up in these sectors.”
Exchange insurance is gathering steam.
Currently, the largest insurance market in the crypto industry is with exchanges that insure against theft from cryptocurrency hackers.
“In the past, there have been hacks which took down entire crypto exchanges, and stole every coin in their wallet. The customers had no recourse, and their funds were permanently lost,” said Rob Zel, founder of bitni.com, a crypto exchange focusing on user privacy. “To prevent this from happening again, exchanges have begun insuring their customer's assets, so, if there is a hack, the customers can at least recover their funds.”
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Exchanges are creating their own insurance programs.
One trend in the cryptocurrency insurance sector is large exchanges creating their own insurance funds when such insurance is unavailable anywhere else.
“A small percentage of each transaction is added to a collective fund, which covers losses by hackers,” Zel said. “We will see more self-insurance by exchanges, although as commercial insurance products are developed, some exchanges may prefer to outsource, instead of dealing with the overhead of managing their own self-insurance funds.”
Currently, the larger exchanges are offering the most insurance to crypto consumers.
For example, Gatehub offers wallets to investors, which they can use to purchase individual insurance for the entire value of their crypto wallets. Other crypto exchanges like Coinbase provide supplementary insurance (backed by Nexus) that covers exchange users who lose 10% or more of their cryptocurrency assets.
Cryptocurrency users are self-insuring.
Insurance providers still largely see cryptocurrency as a risky investment. That’s led to “sky high” premiums for Bitcoin, Ethereum and other crypto investors.
In that scenario, industry investors are taking matters into their own hands.
“There are a few other ways to protect your crypto investments,” said Chris Abrams, founder of Abrams Insurance Solutions. “I recommend sharing private keys with trusted, independent custodians. This can safeguard your wallet against theft.”
Abrams also believes it’s a good idea for cryptocurrency investors to spread their investments into multiple wallets. “That way, you avoid keeping all your eggs in one basket,” he added. “This can minimize your risk in case one wallet goes belly up.
Cryptos will soon be regulated, which may attract insurers.
Cryptocurrency may soon be mainstream, and, with the stamp of normalcy on the industry, regulators would begin to police it.
“With companies like Tesla making large purchases of it, others are soon to follow,” Bilbo said. “This scenario attention will cause the government to step in and attempt to regulate it, which will make cryptocurrencies more compelling for insurers.”
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What can the crypto industry expect from insurers?
In an often-chaotic trading environment, insurance companies may be taking a “wait and see” stance on cryptocurrency coverage, but the financial payoff may be too lucrative to ignore.
“I can definitely see insurers’ appetites for cryptocurrency coverage increasing because the market is clearly there, but I think the growth is going to be slow,” Hamill said. “The possibility for extreme volatility is going to keep most insurers from jumping in too quickly.
“That said, they’re most likely going to be investigating the opportunity.”