When you consider the volatility of the cryptocurrency environment, insurance for cryptocurrencies becomes critical. Massive thefts of online wallets and exchanges have occurred from the growing value of bitcoin and other cryptocurrencies.
As the cryptocurrency markets surge forward, they have begun to attract that attention of players operating within different industries. The insurance industry, for instance, is interested. As per a Bloomberg report, cryptocurrency insurance is set to become the next big industry. This interest stems from the relevance, importance and prevalence with which cryptocurrency is now gaining credence.
What is The Relevance of Insurance in the Cryptocurrency Landscape?
The world of cryptocurrency is primarily made up of start-ups and exchanges owing to which it may not be able to currently provide significant revenue for the insurance industry. Keeping in mind public information available, Coinbase, which serves as North America’s biggest cryptocurrency exchange, has only 2 per cent of its coins insured which are secured under hot storage. The remainder of the cryptocurrency isn’t connected to the internet and whether it is insured or not remains unclear.
The relevance of insurance for cryptocurrencies lies in the fact that there exists plenty of instability within the world of cryptocurrency. The rapid pace at which certain forms of cryptocurrency have gained value has led to major thefts of online wallets along with exchanges. When looking at the impact of these results in their entirety, it is that there exists a vulnerability inherent to the cryptocurrency world that the traditional finance ecosystem either overlooks or disregards.
Insurers presently face a number of challenges when considering cryptocurrencies.
- Ordinarily, insurance premiums are determined keeping in mind historical data. This data isn’t available in the case of cryptocurrencies.
- Volatility in terms of a cryptocurrency’s valuations which imply three-figure price changes aren’t out of the ordinary, they are equally capable of impacting premiums. This is because they reduce the total figure of coins that are insured.
- There is also a layer of regulatory uncertainty and the absence of oversight in terms of cryptocurrency exchanges which can adversely impact insurers seeking to provide their services to this industry.
Cryptocurrencies have always been an element of interest to insurance companies. In 2015 for instance, Lloyd’s released a report outlining risk factors associated with certain cryptocurrencies. They highlighted the fact that recognized security standards for offline and online storage of cryptocurrency would improve asset risk management and make insurance a possibility.
Cryptocurrency Insurance- A Revenue Channel
Problems arising within the world of cryptocurrency can also be a potential stream of revenue for insurance providers. Several insurance products targeting cryptocurrency are tailormade and designed to suit client preferences.
Start-ups and companies functioning within this industry for instance often avail of theft coverage which covers cyber insurance and crime. This coverage, however, does not include hacks. To secure this cover, start-ups may pay up to 5 per cent of their coverage limit. Annual premiums can amount to as vast a figure as USD 10 million to secure theft coverage. In instances of large figures, the coverage is shared by a number of underwriters who are paid between USD 5 million to USD 15 million such that no insurer is held responsible in case of any hacks.
Insurance companies have liked the opportunity available and have formulated new methods to calculate premiums.
Initial Coin Offerings and cryptocurrencies alike involve high risks and a lot of speculation. Different investors have different risk profiles and considerations to account for. Owing to these very facts, investors must always seek out the opinions of professionals prior to making any major financial decisions. While the risks associated are paramount with this sector, they also pave the way for insurance providers who hope to carve out a big industry within this space.
Frequently Asked Questions
Q1. Why is insurance relevant to the cryptocurrency space?
A1. Insurance is relevant to cryptocurrency as there exists a lot of volatility within its ecosystem. The speed with which varied cryptocurrencies have amassed value has led to several thefts online pertaining to online wallets as well as cryptocurrency exchanges. The impact of this goings-on in its entirety renders the cryptocurrency world vulnerable. This vulnerability is either overlooked or not considered by the mainstream financial ecosystem.
Q2. What are some common challenges insurers face when addressing cryptocurrency?
A2. Challenges faced by insurers when viewing cryptocurrency pertain to the lack of historical data available which impacts the ability to determine premiums. Volatility is also a concern as it is capable of impacting premiums. When volatility occurs, the number of coins insured may fall. Regulatory concerns and issues pertaining to oversight with cryptocurrency exchanges can impact insurers abilities to provide offerings within the cryptocurrency landscape.
Disclaimer: Angel One Limited does not endorse investment and trade in crypto currencies. This article is only for education and information purposes. Discuss with your investment advisor before making such risky calls.