Understanding Cryptocurrency Insurance: Protecting Your Digital Assets from Risks

📌What is Cryptocurrency Insurance?

Cryptocurrency insurance is a product designed to protect businesses and investors from risks such as hacking, loss of cryptocurrencies, or the leakage of personal information.

Cryptocurrencies with high volatility are often mentioned as targets for hacking, worth millions of dollars, leading to potential losses of millions for investors and billions for the market. For instance, the blockchain project related to the popular game Axie Infinity suffered a hacking incident resulting in approximately $615 million in losses. Another case involved a theft of around $230 million from the Ronin network, a platform for transferring cryptocurrencies. As hacking can lead to losses for investors, both exchanges and investors require cryptocurrency insurance.

“In 2021, cryptocurrency-based crimes reached an all-time high, with approximately $14 billion (about 15 trillion KRW) funneled into illegal addresses, a significant increase from 2020.”

  • 2022 Crypto Crime Report

💡Meaning and Necessity of Cryptocurrency Insurance

  • As the cryptocurrency market matures, key players from various industries participate in it.
  • Companies dealing with cryptocurrencies need insurance to protect digital assets from theft or accidents.
  • Institutions like exchanges, which act as custodians of customers’ cryptocurrencies, especially require insurance.
  • Consequently, insurance companies offer products that can mitigate risks.

📗Cryptocurrency Insurance Structure

As the virtual asset ecosystem-related industries rapidly expand with the extension of blockchain technology, the associated risks are increasing. However, the products and services offered by insurance companies to cover these risks are still inadequate.

Larger exchanges, for example, have arrangements with major insurance companies to provide remedies in case of hacks involving customers’ deposits.

In addition, some startups have attempted decentralized alternative insurance methods, with virtual asset holders forming pools (DEFI, staking, exchange usage, etc.) to secure funds for insurance payments. Insurance participants in these pools play roles similar to shareholders in insurance companies, receiving profits generated from insurance premiums or virtual asset pool investments. The payout of insurance claims is based on community-based voting or automated coding based on predetermined criteria.

📄Cryptocurrency Insurance Examples

BitGo holds a $250 million insurance policy to protect its self-custodied digital assets. Coinbase safeguards cryptocurrencies held in hot wallets with a $255 million insurance policy. Bakkt offers $125 million insurance targeting institutional investors. Coincover provides liability insurance for online hot wallet theft.

📢Reasons for Hesitancy in Adopting Cryptocurrency Insurance in Regulated Markets

Except for cryptocurrency exchanges, there have been few cases of coin issuers purchasing insurance products. Specialized insurance for virtual assets requires risk evaluation based on past data to calculate loss rates and premiums. However, sufficient data is yet to be accumulated, and the number of potential customers is limited, making the product less attractive to insurance companies. Moreover, the high price of insurance products is another concern. Nevertheless, some insurance companies are entering the cryptocurrency insurance market. In Korea, companies like Hyundai Marine & Fire Insurance, Heungkuk Fire & Marine Insurance, and Samsung Fire & Marine Insurance are exploring opportunities in this field. Lloyd’s and Rillium Insurance have launched Lloyd’s Product Launchpad, a new insurance product protecting cryptocurrencies stored in online wallets from theft or malicious hacking.

✔ Currently, cryptocurrency insurance is less comprehensive and often comes at a high cost. To fully protect cryptocurrency investments, individuals may need to mix and match various insurance products. The insurance industry needs to develop robust and reasonable insurance products to provide investors with reimbursements for lost cryptocurrency investments.

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