Role of Crypto Insurance in Mitigating Risk for Investors

How Cryptocurrency Insurance mitigates risk for investors

Digital assets, often known as cryptocurrency, are increasingly becoming widely accepted as a means of payment and investment. These assets' decentralized and unpredictable characteristics do, however, also come with a special set of hazards.

In light of exchanges being frequent targets of scams resulting in substantial financial losses, securing money has become an immediate and crucial necessity. Crypto insurance is crucial for anybody making investments in digital assets.

Businesses that store cryptocurrencies on behalf of their clients need insurance that covers clients' losses from theft and system or hardware failures since they are frequently targeted by hackers and thieves. Insurers have a market opportunity due to this demand, provided they can effectively mitigate the associated risks.

As the market expanded, self-custody became less viable, particularly for large, complicated organizations with a large workforce. Customers have lost cryptocurrency worth millions of dollars due to significant thefts that have occurred on large exchanges. While exchanges may not be the site of every cryptocurrency heist, they constitute the majority, given their central role in storing crypto keys.

Many cryptocurrency exchanges assume ownership of and secure keys belonging to their users. Additionally, brokers aiming to hold and securitize cryptocurrencies are fueling the development of new investment products.

Due to the centralized holding and interest, it becomes incumbent upon all parties to securely keep Bitcoin. Organizations resort to specialized storage providers to keep their cryptocurrency since doing it yourself is expensive and unsafe. This is the point at which problems arise. Let's take an example where you keep your Bitcoin at an exchange.

The exchange needs personnel to maintain its security and data storage hardware. They contract with another firm to store the Bitcoin keys if they lack the necessary hardware or personnel, and that company hires workers to maintain and protect the data storage hardware and software. Contracting security companies probably provides both physical and cyber protection, requiring more personnel, connections, software, and technology.

The more entities engaged, the greater the vulnerabilities and hence, the opportunity for criminals. Insurance is the only method to guarantee that the assets the original customers left in custody can be restored in the event of an emergency, as storing such a large quantity of money is a tremendous responsibility.

Businesses in the cryptocurrency field have failed to secure the assets of their consumers, and as a result, billions of dollars' worth of cryptocurrency continue to be stolen. Insurance companies have gradually realized how important it is to have policies that cover the loss and theft of virtual and digital assets, as well as the increasing potential that this presents.

Several businesses offer insurance services to cryptocurrency-related enterprises. To minimize their risk exposure, some insurers might stipulate that clients adopt particular security measures, while others may require that insured assets be entrusted to a reputable custodian. In order to protect the assets of its clients, several exchanges and companies employ the services of insurance companies. Some examples of the coverage that companies in the Bitcoin sector offer are as follows:

BitGo: Bitgo supplies digital assets to exchanges and small-scale bitcoin businesses. Up to US$250 million in assets under its care are covered under its policy. Notably, BitGo's exclusive control over the client's cryptocurrency holdings is the only scenario covered by the policy. Lloyd's serves as BitGo's insurance underwriter.

Coinbase: Among the most well-known retail cryptocurrency brokers, Coinbase offers a US$255 million coverage that protects cryptocurrency kept in hot wallets. Nevertheless, thefts resulting from lost passwords, third-party wallet breaches, or illegal access to the client's accounts are not covered by this policy.

Bakkt: An institutional investor-focused cryptocurrency custody company, Bakkt offers up to US$125 million in insurance coverage for assets under its management.

Coincover: A panel of Lloyd's insurers underwrites Coincover's policies, which offer business liability insurance against thefts from cold and hot wallets. These policies' limits fluctuations based on market pricing.