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Cryptocurrency exchange hacks present many challenges for investors and exchanges. These events not only mean large financial losses for current investors but can also dissuade potential new users from using cryptocurrency exchanges. Even though there a number of technical solutions that exchanges can implement, cryptocurrency users are also looking towards bitcoin insurance as a potential backup plan. 

In this article, we examine the various options available for cryptocurrency insurance and how this will shape the future of the market.

The recent history of hacks shows that cryptocurrency exchanges are vulnerable to hacks and third-party interference. From 2011 to 2018, there have been a number of large-scale hacks. Even if the amount of tokens being stolen these days is lower, the value of funds stolen from hacks seems to be increasing as token prices have increased over the years.

Technology is likely the most effective way to stop these hacks. While many exchanges are working on better security via decentralized databases and non-custodial options, centralized exchanges still remain quite popular, accounting for 99% of all cryptocurrency transactions. This centralization has led to many security issues, though.

Even hardware wallets have been hacked and stolen from in the past. Since even the most secure options can lead to the loss of cryptocurrency funds, many users and exchanges are considering bitcoin insurance options.

Cryptocurrency insurance is an interesting concept for quite a few reasons. First, any insurance provider must consider the risks of providing coverage. Calculating risk for other, more traditional forms of insurance is thought to be much more simple. For example, for flood insurance, it can be straightforward to predict the likelihood that an event will occur based on weather patterns, geography, climate, and other factors. This makes it easier for insurance companies to make profits from coverage.

In contrast, the security of cryptocurrency exchanges or even hardware wallets is much more dynamic. An exchange that once had a stellar reputation of being unhackable could one day suffer from a hack, resulting in losses totaling hundreds of millions of dollars.

Even if a user is covered, it might be difficult to determine how to best recover lost funds. For example, does the insurance provider cover the loss in fiat currency, the same cryptocurrency that was stolen, or in another cryptocurrency altogether?

All of these question marks mean that many potential insurers have been rather skeptical in how to provide proper bitcoin insurance coverage options.

Assessing the risk of cryptocurrency insurance has been difficult for insurers.

In 2018, the availability of cryptocurrency insurance presents a Catch-22 for exchanges. Insurance firms have serious questions regarding the security of exchanges. Because risk is hard to calculate, the feasibility of decent coverage for exchanges is quite poor. On the other hand, many investors are also skeptical of cryptocurrency exchange security and would rather choose an exchange that’s insured. This issue is far from theoretical and has played out in a few different real-world scenarios.

Bithumb was insured by Hyundai Marine & Fire Insurance and Heungkuk Fire & Marine Insurance Co before a hack that took place in June 2018. Even though the hack resulted in the loss of around $31 million in funds, the insurance coverage only provided $5.39 million in coverage. This meant that the exchange had to pay the remaining $25 to $26 million using its own funds.

The good news for those investors who lost funds was that they were easily able to receive what was lost. Most importantly, the exchange didn’t require users to pay additional fees beforehand in order to receive protection. While the hack itself was bad, this was probably an ideal situation for investors. Since Bithumb is a popular exchange with large profits ($424 million in 2017), investors didn’t have to worry as much about their lost crypto.

It’s important to also note how larger scale hacks affect insurance policies. For example, hackers stole $545 million in NEM during a hack of Coincheck. This hack was around 17x larger than the Bithumb hack. But, Coincheck’s profits from April 2017 to January 2018 were only around $490 million.

There isn’t any information publically available about Coincheck’s insurance policy; however, the company did begin to refund all users after this incident. The question many investors have is how will an even smaller exchange react to a large hack? There’s a possibility that an exchange can’t cover the loss through insurance or previous profits.

Nonetheless, it’s easy to see how having an insurance policy could ease the financial burden of a hack. A cryptocurrency exchange that does have insurance could possibly mitigate fears of existing users and potential new users as well.

Bitcoin insurance policies are costly and typically don’t cover all funds lost during hacks.

As mentioned above, insurance might be a necessary expense for cryptocurrency exchanges. There are a number of companies that offer bitcoin insurance for individual investors as well. These include Great American Insurance Group, XL Catlin, Chubb, Mitsui Sumitomo Insurance, and others. Some of these options are well-established. Others are still in the works of implementing insurance policies or continuing to evaluate the correct costs for customers.

Unfortunately, insurance premiums are far from cheap. For the vast majority of individual investors, these options are pretty much out of the question. Even for those institutional investors that do have the funds to spend, buying insurance from one of the above-mentioned providers might not be a viable option. For example, XL Catlin’s policy will reportedly have a premium of $200,000 for $10 million in coverage.

It’s possible that we could see more practical options with lower premiums for individual investors in the future. There are a few companies like Allianz that have talked about the possibility of expanding insurance services to cover individual hacks and crypto storage. Nonetheless, it appears that this part of the cryptocurrency insurance market is relatively underdeveloped. Even insurance policies for crypto-related businesses and ICOs are being formed on a case-by-case basis. 

Statistically speaking, it’s difficult to tell if cryptocurrency insurance policies will become an industry mainstay or even a legal requirement in the future. On one side, insurers show reluctance in accepting high risk. This has a lot to do with the unpredictability of when hacks will occur or what amount of funds could be stolen. On the other side, more cryptocurrency users could become more likely to trade on insured exchanges.

Will individual users have the option to buy insurance policies in the future? Will exchanges continue to take on full financial responsibility? What sorts of insurance policies will emerge to protect individual users from hacks or theft? Answers to these questions will help form the future of cryptocurrency insurance policies.

The post Bitcoin Insurance Policies – What They Are and Do You Need Them appeared first on CoinCentral.

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