The cryptocurrency market has grown tremendously and keeps on developing, with the demand for surging security solutions. Investors, traders, and institutions are seeking protection against the risks associated with this relatively new, extremely volatile asset class. Crypto insurance can be one of the solutions to protect these digital assets from diverse threats. This article delves into what crypto insurance is, what risks it covers, and how one can buy it to protect their investments.
Insurance of cryptocurrency covers virtual assets lost or stolen in certain cases. Most of the cryptocurrency insurance providers cater to services for institutions such as exchanges, while most of their policies do not cover consumers unless their cryptocurrency is involved in an exchange hack or failure of its systems.
Insurance companies offer restricted coverage, which oversees certain situations but not all. Cryptocurrency insurance usually covers certain circumstances when virtual assets go missing or get stolen. For example, if the website of the exchange where you kept your private keys gets hacked and your money is pilfered, you might be covered provided the website has a policy to that effect.
If you store your private keys in a non-custodial wallet, a wallet that is not created by the exchange, in that case, you might not get coverage. There is currently no insurance policy for consumers who manage and hold their private keys independently.
Insurance provides little protection if a crypto exchange goes bankrupt since customers are usually last in line for any payouts. You can protect your funds by using a non-custodial wallet, where you have full control over the private keys, but that can put the entire burden of funds on you.
Other exchanges, like Coinbase and Gemini, have commercial crime insurance that covers them in the event of a platform breach or system failure. Robinhood gives crime insurance against theft and data breaches of assets. Crypto.com also insures against physical damage to the assets, destruction, and theft by third parties.
Everts is the world's first crypto insurance company and has a suite of products on offer. Other popular ones include blockchain and crypto insurance companies such as Superscript and Breach, among others.
Crypto-insurance policies can be expensive due to the lack of regulatory oversight and standard security for hot and cold storage. Generally, individual crypto insurance could cost around 2.5% of the investment. This means that insuring $10,000 of cryptocurrency could cost an estimated $250.
Crypto and blockchain systems are supposed to handle money based on an idea called DeFi, or decentralized finance, in which anyone is supposed to be able to buy and sell goods, services, and other securities without the use of a bank or similar intermediary.
Decentralized insurance means coverage via smart contracts. These are programs that automate some kind of agreement between two parties, automatically executing under specific conditions. For example, if your cryptocurrency keys stored on an exchange were stolen, a smart contract could instantly transfer funds into your account.
Traditional insurance companies are hesitant about writing policies to cover losses in cryptocurrency. Businesses that have customers dealing in cryptocurrency, until now have been the only recipients of their coverage.
However, since centralized insurance is another target of blockchain projects, you will notice a lot of decentralized insurance platforms that claim to insure users' assets. For the most part, these should be avoided, because they are new in the investment field. Also, the only way to find out if these scams are scammed in reality.
Decentralized insurance might involve nothing more than smart contracts that automatically trigger when certain events take place. For example, if you have stored your cryptocurrency keys at an exchange and they were stolen in a hack, a smart contract could automatically transfer funds into your exchange account without any claim process.
The general growth and development of the cryptocurrency market go hand in hand with increasing risks. Crypto insurance is one potential mitigation strategy against theft, hacking, or technical failure. In its current form, this new kind of insurance is limited, however, it's useful for institutions and exchanges. Investors, for their part, should not wait but explore custodial and non-custodial wallet options. In addition, crypto insurance is part of a broader approach to securing digital assets. As DeFi and smart contract-based insurance platforms develop, the future of cryptocurrency insurance, there could be more availability to protect users from the uncertainties that come with the use of digital currencies.