From crypto hacks to rug pulls, the cryptocurrency world remains a rather exposed industry, and therefore, investors are increasingly looking at ways to protect their assets from being stolen. Users with deep security concerns often ask, What is Crypto insurance?
Crypto Insurance is a fail-safe method to get your money back if an unfortunate incident takes place. Crypto insurance promises the protection investors seek.
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What is Crypto Insurance?
Crypto insurance is a type of insurance policy that covers losses caused by cybersecurity breaches. Most major cryptocurrency exchanges carry some form of insurance to protect digital assets in their custody from theft and other security breaches.
Because cryptocurrency is not legal tender, it is not insured by banks in the same way that other deposits are. In the United States, for example, bank deposits are typically insured by the Federal Deposit Insurance Corporation (FDIC).
On the contrary, exchange insurance is intended to cover losses incurred during covered security events. Total losses, on the other hand, may occasionally exceed insurance recoveries, leaving some investors unable to recoup their entire investment. Furthermore, policies do not cover personal losses, such as those resulting from lost credentials or personal data breaches.
How does Crypto Insurance work
The crypto insurance market is largely divided into two categories: native platforms designed to manage policies on-chain and traditional insurance purchased from established firms or markets such as Lloyd’s of London.
Blockchain-based insurance is created by and for digital asset natives. These platforms, such as Nexus Mutual, provide coverage to individuals and businesses by utilizing blockchain-based mutuals, smart contracts, and community-led pricing.
With the blockchain recording the transaction’s terms, size, and other data, policies, and claims can be handled instantly, with the community arbitrating any potential disputes.
Firms such as listed corporations or regulated asset managers, on the other hand, frequently require commercial insurance for such activities.
This is where the traditional market comes into play. While insurers have long been interested in cryptocurrency, the recent increase in the variety and value of digital assets, as well as increased interest from their clients, has resulted in significant improvements in the coverage available.
With some of the world’s largest insurers involved, the opportunity for both parties is enormous. These policies can help to ease the entry of billions of dollars of pent-up demand from mainstream institutions, paving the way for greater crypto adoption.
Do Crypto Exchanges Insure Your Digital Assets?
The crypto insurance industry is still in its infancy, and many crypto assets are simply not insured. Most insurance policies are intended for businesses and corporations rather than individual consumers.
Crypto wallets and exchanges purchase insurance policies that include coverage for cyber theft and security threats. Other types of coverage are still being developed and may include additional protection, such as decentralized finance (DeFi) insurance, which may include protection against funds lost due to the shutdown of a service provider, lost private crypto keys, or similar disasters. These policies, however, are not yet available for purchase by consumers.
You can check out this great article on Which Crypto Exchanges have Insurance.
In other words, the average consumer’s protection is heavily reliant on the services he or she accesses and employs. The most basic level of security should include two-factor authentication (2FA) as a standard for the safest experience. When users log in, they are asked to provide additional information, such as a code.
It is also recommended to use a cold wallet for the majority of digital assets. Hot wallets are more convenient, but hackers can easily access them. Cold wallets are offline and typically air-gapped, making them safe from those with malicious intent.
Most exchanges provide additional security measures, such as cryptocurrency insurance programs. These aren’t backed by government-sponsored insurance plans like traditional banks, but if the exchanges are hacked, your funds will be safe and you’ll be compensated for your loss up to the amount specified in the insurance policy.
Why do we Need Insurance in the Cryptocurrency Ecosystem?
Numerous hacks have put crypto funds in jeopardy in 2021 alone. More than $600 million was stolen from Ethereum, Binance Smart Chain, and Polygon wallets alone as a result of the Poly Network hack.
In two separate hacks, Cream Finance lost nearly $150 million in Ether, Bitcoin, and stablecoins, and in December, hackers stole nearly $200 million from Ethereum and BSC wallets. Investing in cryptocurrency holds the promise of large returns, but the risks are very real in a volatile cryptocurrency market.
There is a genuine need for crypto insurance policies, but insurance policies and premiums are typically based on historical data. Because the crypto market is still so new, historical data is often scarce, and market volatility can complicate matters further.
When the value of Bitcoin and other cryptocurrencies skyrockets, hot wallets and exchanges become especially appealing to hackers and thieves. For example, Crypto.com confirmed on January 20 that it had been hacked, with over 400 users affected by unauthorized withdrawals on their accounts.
Following that, Lloyd’s of London reported using a variety of risk management strategies, such as cold storage, multi-signature wallets, and server-side security. Crypto insurance can fill in the gaps, protecting users from losses in a volatile, vulnerable system.
Can I Buy Personal Crypto Insurance?
In general, institutional losses are covered by crypto insurance. If a crypto exchange suffers a security breach, its losses will be covered up to the policy limit. However, this emerging industry is starting to recognize the importance of individual crypto coverage. Coincover, an insurer, is now providing the service. Coincover is collaborating with Lloyd’s to develop a cryptocurrency policy that extends beyond what an exchange would typically cover.
Account holders’ digital assets are protected against hacking, phishing, malware, device theft, trojan software, and brute force attacks under the policies, which range in price from $10 to $750. However, there are some exclusions, and certain types of losses, such as price fluctuations, blockchain failures, and hardware loss, are not covered.
What is Crypto Insurance: Bottom line
Crypto is becoming more mainstream, and this insurance is expected to be a critical component in driving wider adoption of Web3 in the coming years. Insurance carries a lot of weight, especially in the institutional world, not only for protection against loss but also for instilling the confidence needed for people to innovate and take risks.
The potential for this virtually unregulated industry is nearly limitless, which makes the risk-averse insurance market nervous. That doesn’t mean there aren’t plenty of opportunities available to you. Proceed with caution, keep your wallet safe, and make wise investment decisions.