What Is Crypto Insurance?

What is crypto insurance? Many people want to protect themselves in case of crypto or other virtual asset loss.

Fortunately, that’s possible through crypto insurance, but it is not widely known. That’s why, today, you’ll learn everything about this coverage: how it works, its price, the insurance market, and more. Without any further ado, let’s start.

What Is Crypto Insurance?

Since traditional insurance solutions often fail to provide proper coverage due to specific crypto risks, like regulatory issues or scams, specialized solutions fill this gap. They are made particularly for the digital ecosystem.

Blockchain-based insurance enables gains in efficiency and transparency over traditional insurance systems. So, what is crypto insurance?

Crypto insurance covers cryptocurrencies and other virtual assets that are stolen or lost under certain circumstances. Most policies don’t cover users unless their crypto is affected by an exchange hack or system failure.

For example, you might be covered if you lose your funds due to a hack of the exchange where you’ve stored your private keys. Yet, if you use a wallet the exchange supports to store your private keys but didn’t create or maintain the wallet yourself, you may not be as lucky. There’s still no policy protecting consumers who hold their private keys themselves.

So, with the best crypto insurance, companies, institutional investors, and individuals are financially protected against losses caused by incidents like fraud, theft, operational mistakes, hacking, and legal actions.

How Does Crypto Insurance Work?

Cryptocurrency insurance focuses on assessing the insured party’s risk profile, creating plans that meet their needs, underwriting to determine insurability, and helping process claims. Let’s explain this step by step.

When assessing the insured party’s risk profile, the insurer considers several factors, such as:

Then, insurers create plans to assess the insured’s specific requirements and risk tolerance.

Afterward, premiums are computed using many factors, such as past breach data, market conditions, coverage limits, asset valuations, and security measures. Since the process of determining the conditions of the coverage and assessing whether a risk is insurable is over, the next step is underwriting.

Cryptocurrency insurance underwriters conduct thorough assessments to determine insurability and establish coverage terms and conditions. That includes analyzing security infrastructure, regulatory compliance, operational protocols, and the insured party’s financial stability.

After the covered loss or incident, the insured party informs the insurer of the claim and provides supporting evidence and documents. After verification, the insurer pays the agreed-upon amount, which helps the insured overcome the impact of financial loss.

How Much Does Crypto Insurance Cost?

The cost of crypto insurance is dictated by the provider, the customer’s needs, the region the customer is based in, and the particular coverage chosen. Moreover, the factors influencing the price are the risks covered, the insured asset value, and the needed protection level.

Insurance providers’ plans and pricing structures differ, so you should research before deciding. Overall, the average cost of a general liability insurance policy for US crypto businesses is $400–$700 per year.

What Is the Insurance Fund in Crypto?

The insurance fund represents protection against contract loss in leveraged trading. It is crucial to crypto derivatives exchanges and protocols, as it is used to pay the traders if liquidations result from their failure, to take timely measures and prevent their open positions from bankruptcy. A crypto insurance protocol can help manage these funds efficiently.

Liquidation penalties, exchange fees, or other means are usually used to fund insurance funds. When there’s leveraged trading, every position has liquidation and bankruptcy prices. If the former is higher than the latter, the position is liquidated, and a part of the remaining margin is usually added to the insurance fund. If the liquidation price is lower than the bankruptcy price, the insurance fund covers the loss.

Protocol designers and exchange operators must carefully consider the insurance fund when building, designing, and operating an exchange that offers leveraged trading to ensure the exchange’s solvency.

How Big Is the Crypto Insurance Market?

The market is still in its inceptive stage, and most projects are in the concept phase. Still, companies are increasingly exploring blockchain technology’s use cases in the insurance industry.

In addition to the increasing investments, the market is primarily driven by the high popularity of automated claims management solutions. Technology is also expected to transform the insurance industry positively in the future.

So, what is the crypto insurance market’s size? In 2022, the global blockchain in insurance market size reached $766 million. It is expected to grow with a CAGR of 61.2%, from $1.19 billion in 2023 to $33.55 billion by 2030, driven by new cryptocurrencies and innovations. In 2022, North America accounted for $254.2 million market value and a share of 33.19%.

Concerns About Crypto Insurance

A primary problem with this insurance is that it’s challenging to make policies fully comprehensive. Insurance companies still analyze and evaluate many different blockchain and crypto elements.

Crypto mining operations are typically large and require expensive mining equipment. Over its lifetime, every mining rig is expected to generate an estimated income amount, adding to its value. Mining rigs depreciate over time, as they are tangible equipment.

Underwriters must consider all expenses, expected income, and depreciation when creating insurance policies. However, since the technology is new, most of the information they use isn’t available.

Therefore, underwriters don’t have well-established baselines when determining premiums, values, and coverage options or types. Moreover, there’s still a lack of insurance for retail crypto users and investors.

While some crypto insurance companies have plans covering stolen or lost crypto, provided the keys are held in a custodial wallet, there are very few providers for crypto users who use third-party wallets or store the keys themselves.

The Future of Cryptocurrency Insurance

The combination of institutional adoption, regulatory developments, Web 3.0, and continual improvements to the crypto space establishes it as an industry that will continue growing in the foreseeable future. However, due to its highly volatile nature, the industry is not yet fully normalized for insurers to cover it.

Reinsurance is imperative for the evolution of crypto exchange insurance. Reinsurers will need to serve as the catalyst for primary insurers to offer coverage, as only some, if any, will be willing to do so independently.

Considering cryptocurrency’s continuous growth, insurance companies will probably explore this unknown territory and expand their business. As cryptocurrency becomes highly integrated into our daily lives, the supply of crypto insurance will meet the increasing demand.

Conclusion

So, what is crypto insurance? In a nutshell, it covers cryptocurrencies and other virtual assets that are stolen or lost under certain circumstances. It focuses on assessing the insured party’s risk profile, creating plans that meet their needs, underwriting to determine insurability, and helping process claims.

The insurance fund protects against contract loss in leveraged trading and is crucial to crypto derivatives exchanges and protocols.

The crypto insurance market is still in its inceptive stage, and all crypto insurance projects are also in their concept phase. Still, considering cryptocurrency’s continuous growth, insurance companies will probably explore this unknown territory and expand their business in the future.

So, crypto insurance gives a bit of reassurance when considering if cryptocurrency is a good investment in 2024.

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