Cryptocurrency Insurance Could Be a Big Industry in the Future

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Cryptocurrency Insurance Could Be a Big Industry in the Future

As bitcoin marketplaces develop, participants from different sectors are flocking to them. One of them is the insurance business.

According to Bloomberg, bitcoin insurance is set to become a “significant potential.” According to a spokeswoman for Allianz, one of the world’s largest insurers, the business is evaluating product and coverage alternatives in the field since cryptocurrencies are “growing more relevant, vital, and popular on the real economy.”

Key Takeaways

  • According to Bloomberg, bitcoin insurance is set to become a “significant potential.”
  • When considering the volatility of the bitcoin environment, insurance for cryptocurrencies becomes critical.
  • Massive thefts of online wallets and exchanges have occurred from the increasing value of bitcoin and other cryptocurrencies.
  • Regulatory uncertainty and a lack of regulation at cryptocurrency exchanges may complicate things even further for insurers interested in serving the sector.

Why Does the Cryptocurrency Ecosystem Need Insurance?

The cryptocurrency sector, which is mostly comprised of startups and exchanges, may not yet be large enough to generate significant income to the insurance industry. According to publicly accessible data, even North America’s biggest cryptocurrency exchange, Coinbase, insures just 2% of its assets with Lloyd’s of London. These coins are kept in warm storage (or are connected to the Internet).The remainder are not linked to the internet, and nothing is known about their insurance status.

When considering the volatility of the bitcoin environment, insurance for cryptocurrencies becomes critical. Massive thefts of online wallets and exchanges have occurred from the increasing value of bitcoin and other cryptocurrencies. In January 2018, for example, $500 million in cryptocurrencies was stolen from the Japanese cryptocurrency market Coincheck. As a consequence of these attacks, the mainstream banking environment has become susceptible, which it either ignores or refuses to take seriously.

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Consider the story of BitGo, a blockchain security business, as an illustration of the risks of bitcoin insurance. In 2015, the firm claimed to have obtained insurance from XL Group for currencies stored in its care. However, it momentarily withdrew and then reposted a blog post announcing the statement after a breach at Bitfinex, a cryptocurrency exchange that was also a client, which resulted in the loss of more than $70 million in bitcoin.

Insurers have distinct issues when it comes to Bitcoin and cryptocurrencies. Insurance rates are often calculated using previous data. Such information does not exist for cryptocurrencies. Volatility in values, which may create three-figure price fluctuations, can also decrease premiums since it affects the overall number of coins covered. Regulatory uncertainty and a lack of regulation at cryptocurrency exchanges may complicate things even further for insurers interested in serving the sector.

To be sure, insurance firms have long been interested in bitcoin. Lloyd’s published a paper in 2015 outlining the cryptocurrency’s risk considerations. “The creation of accepted security standards for cold (offline) and hot (online) bitcoin storage will substantially aid risk management and insurance coverage,” the company noted. Server-side security, cold storage, and multi-signature wallets were all cited as potential techniques to prevent risk attacks.

A Source of Revenue

However, issues inside the bitcoin ecosystem might be a source of money for the insurance business. Most insurance policies targeted at the sector are customized to meet the demands of the customer. According to Bloomberg, startups and businesses in the bitcoin market generally choose theft coverage, which covers cyber insurance and crime. However, hackers are not permitted. According to the research, startups may wind up paying up to 5% of their coverage limits. According to the Insurance Journal, yearly rates for theft coverage might reach $10 million. In situations of significant quantities, coverage is divided across dozens of underwriters for amounts ranging from $5 million to $15 million to guarantee that no one insurer is held liable in the event of a cyberattack.

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Insurance firms, drawn to the possibility, have invented new methods of calculating rates. AIG’s North American Cyber Insurance business leader, Christopher Lin, likened the crypto market to a digital armored vehicle service. He said that he had chosen a strategy of looking for an established firm that did not have a comparable risk profile.

Investing in cryptocurrencies and other Initial Coin Offerings (“ICOs”) is very dangerous and speculative, and this article is not a suggestion by Investopedia or the author to do so. Because every person’s circumstance is different, a knowledgeable specialist should always be contacted before making any financial choices. Investopedia makes no guarantees or warranties about the accuracy or timeliness of the information provided on this site. The author holds a minor quantity of bitcoin and litecoin as of the date this article was published.

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