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Cryptocurrency investors are showing strong demand for asset protection in the form of cryptocurrency insurance. But while some providers see the cryptocurrency insurance market as promising, many are wary of entering.
One of the attractions of cryptocurrency, particularly for small and midsized enterprises (SMEs), has been the ability to avoid the mainstream financial system and the oversight, intrusiveness, and regulation that come with it. But the meteoric rise of cryptocurrency has in many ways outpaced the infrastructure built to support it. Crypto insurance policies are designed to protect against cryptocurrency losses, theft, and general cryptocurrency capital loss.
Cryptocurrency theft is a real risk. High profile cryptocurrency thefts have gained media attention: Mt. Gox lost $460 million to hackers in 2014; Bitfinex lost 120,000 BTC in 2016;7 and Coincheck lost $530 million belonging to 260,000 customers in 2018. In the first three quarters of 2018 alone, the theft of cryptocurrencies through hacks on exchanges and trading platforms amounted to almost $1 billion, a 250 percent increase over 2017.
Other, less nefarious risks abound as well, ranging from human errors and mistakes to technical glitches and price volatility.
Cryptocurrency Insurance Market Supply Lags Far Behind Demand
These risks have led cryptocurrency investors and users to seek out ways to protect their assets, and firms are increasingly seeing crypto-insurance as a lucrative business line.11 Providers of crypto insurance can charge annual premiums equal to between one and five percent of the covered assets.12
But despite the highly-publicized risks, major industry players say they aren’t aware of any insurer that’s yet had to pay a crypto-insurance claim.13 That’s led to increased investment in crypto-insurance by firms like Marsh & McLennan—which recently formed a team of 10 staff dedicated solely to servicing blockchain startups—and Aon, which claims over fifty percent of the crypto insurance market.
More broadly, a recent Greenwich Associates survey found that 72 percent of institutional investor respondents said they believe cryptocurrency has a place in the future, and Aon says some insurers have even started adding crypto-insurance as part of their general policies.
And yet, the supply side of the cryptocurrency insurance market is not keeping up with demand. While the global market capitalization of cryptocurrencies is in excess of $100 billion, there is only $6 billion in available insurance coverage.18 Industry observers have found a great deal of reluctance on the part of established insurance companies to even discuss their involvement and level of exposure in the crypto insurance market.
Crypto exchanges have been cited for failing government security checks, and potential insurers see a lack of industry infrastructure as a risk of offering policies covering crypto.
A challenge for cryptocurrency investors is convincing potential crypto-insurance providers that the level of risk involved is manageable.
This is difficult when providers are unfamiliar with how cryptocurrency works in the first place, and when what they do hear about the industry is high-profile news coverage of hacked bitcoin accounts and volatile markets causing dramatic cryptocurrency capital losses. Additionally, the novelty of cryptocurrency markets means that potential providers are deprived of the historical data on cryptocurrency losses they would otherwise use to predict the value of the risk they are being asked to assume.
Faced with limited supply and high premiums of crypto-insurance, some cryptocurrency investors are opting to self-insure or simply forgo insuring their crypto assets altogether.
For SMEs, the high costs of crypto insurance may negate two of the primary benefits of using cryptocurrency: speed and cost. The high premiums and restrictions imposed by crypto-insurance providers re-introduce some of the cost and hurdles avoided by bypassing traditional banks.