Are Crypto Wallets Insured? Everything You Need to Know

8 min read

Insurance

Every investor looks for secure insurance policies to protect their funds and investments against losses or theft. People invested in traditional securities, such as bonds and stocks, enjoy a wide variety of insurance options provided by the government and many private firms.

Unfortunately, investors who own cryptocurrencies or other digital assets face a different set of challenges.

Crypto investors have few options for insurance. Most insurance companies are hesitant to enter this market due to the unpredictability and lack of a legal framework governing the crypto industry.

However, as the demand for insurance policies backing crypto deposits grows, we are seeing some startups take steps toward insuring crypto wallets. The options are certainly not as numerous as those available for traditional investments, but things appear to be much better than they were just a few years ago.

Why Is There a Need for Crypto Insurance Policies?

Individual and institutional cryptocurrency owners are both plagued by the fear of their crypto accounts being breached or a hacker stealing all of their funds. According to Chainalysis data, more than $14 billion in cryptocurrency was stolen in 2021 alone, with the majority of it occurring on DeFi (decentralized finance) platforms. This represents a massive 516 percent increase over the total amount of crypto funds stolen in 2020.

Yet, these thefts are not the only concerns crypto investors face today. We have seen incidents where hackers breached an entire exchange and slipped away with digital assets worth several hundred million dollars. In the infamous 2016 Bitfinex hack , about 119,754 Bitcoin tokens (now worth $4.9 billion) were siphoned from the users' accounts into a private wallet. Similarly, the Mt. Gox tragedy , when almost 850,000 Bitcoin tokens (now worth more than $35 billion) got stolen, still haunts every cryptocurrency holder.

Many crypto investors use crypto wallets to secure their funds from online breaches and hacks, but that’s not 100% protected either. You could forget the security keys for your online wallets and lose or damage cold wallets.

This is where the need for dependable cryptocurrency insurance policies arises, and it is becoming more pressing by the day.

Does the Government Provide Insurance for Cryptocurrency Investments?

The US is home to more than 50% of the total number of blockchain and crypto companies in the world. Considering this number, we can comfortably say that the US is the largest haven for the crypto industry. Other research suggests that about 46 million American adults (almost 22% of the population) have either invested in or used cryptocurrencies at some point.

Given these statistics, it makes perfect sense for the US federal government to provide some insurance backing for people to protect their cryptocurrency investments. Yet, to no one’s surprise, the government of the world’s largest crypto country has no federal insurance for digital assets.

Federal Deposit Insurance Corporation (FDIC) is an independent federal agency and it provides an insurance policy for US citizens which covers deposits up to $250,000 (per person, per bank). It covers savings accounts, money market deposit accounts, checking accounts, and certificates of deposits. However, this policy does not cover crypto deposits or investors.

Another agency, named Securities Investor Protection Corporation (SIPC), covers insurance on deposits at brokerage accounts to purchase securities, such as stocks. But this institution also does not protect crypto deposits.

As far as federal insurance protection for crypto investors is concerned, there is no policy from the US government to date.

Do Crypto Exchanges Offer Insurance?

You can have insurance protection through the crypto exchange you are using to buy and hold your crypto assets. However, it must be noted that not all exchanges offer insurance coverage. The type of insurance policies also varies from one exchange to the other. Some work with third-party commercial insurance firms, while most exchanges prefer the traditional self-insurance practice.

“A small percentage of each transaction is added to a collective fund, which covers losses by hackers. We will see more self-insurance by exchanges, although as commercial insurance products are developed, some exchanges may prefer to outsource, instead of dealing with the overhead of managing their own self-insurance funds,” says Rob Zel, the founder of Bitni exchange .

Coinbase , the biggest crypto exchange in the US by trading volume, has a $225 million insurance policy. Bitstamp not only carries a $300 million insurance plan, but you can also keep your assets insured by using its wallets: Copper and BitGo.

Similarly, BlockFi , another popular exchange, also provides insurance through its custodial wallet, Gemini.

However, the problem with exchange-offered insurance is that it covers your losses only in case of a platform-wide hack. Moreover, if the total amount stolen exceeds the insurance recovery, you may not get any help with recovering your losses.

Insurance Policies for Hot Wallets

Another way to ensure your cryptocurrency investments and digital assets is to use insurance-backed hot wallets .

Hot wallets are crypto wallets that are always connected to the internet and can be used to buy or sell tokens. A few companies have emerged in the marketplace in the last few years, providing insurance services for these hot wallets.

The first and the most significant of these is Coincover , an insurance-backed protection platform for crypto investors. Coincover offers its insurance policies for a few crypto wallets such as Civic, BitGo, and Vesto.

Anyone using these wallets becomes eligible for their insurance plan. If their protection technology fails and results in someone hacking into your wallet or stealing the device, Coincover reimburses you to cover your losses. The amount it pays depends on the protection level of the wallet you purchased.

Coincover worked with Lloyd’s of London to underwrite the insurance-backed guarantee.

“As more money flows into the crypto asset market, losses from hacks are on the rise,” says Trevor Maynard, head of innovation at Lloyd’s. “Nevertheless, cryptocurrency companies have found ways to protect their digital assets from theft and, by working closely with Lloyd’s underwriters, to insure losses that do slip through the net.”

Personal Insurance for Cryptocurrency

Okay, but what if you want to purchase personal insurance for your crypto wallets, which works more like the traditional private insurance companies for securities? Yes, some insurance providers are currently working on these lines, but the industry is still very nascent, so the options are very limited. To our knowledge, only one company is providing this service in the US.

Breach Insurance is a Boston-based company, and their product Crypto Shield is the first regulated insurance plan for personal crypto wallets. At the time of this article, they are licensed in 13 US states, including New York, California, and Washington. We expect more states to be added soon.

The insurance covers 20 cryptocurrencies, all of which are popular and widely used. BTC, ETH, LUNA, SOL, and ADA are some of the coins covered. The service is currently available within just four crypto exchanges:

  • Coinbase
  • Coinlist
  • Gemini
  • Binance US

Breach Insurance does not cover any third-party crypto wallet.

Crypto Shield covers losses occurring due to hacks or exploitation in your exchange wallet. The policy covers assets worth anywhere from $2,000 to $1 million.

Why Are So Few Companies Providing Crypto Insurance?

Anyone even remotely familiar with how the economy works would question: if the demand for crypto insurance is so high, why are insurance companies not providing it? Well, there are several reasons for this gap in the market.

For starters, cryptocurrencies and digital assets are highly speculative, making it challenging to make risk assessments. Secondly, the price for these assets fluctuates every day. Unlike the stock market - which is a few centuries old and pretty established at this point - price actions in the crypto market are much steeper and sudden. Both these factors cause the insurance fees for crypto insurance services to jump very high.

Lastly, being a novel industry, most governments worldwide have not yet formulated any laws and legal regulations around this innovation. This again leads to more complications for the insurers.

According to Savanna Bilbo, a consultant at Pelicoin (Bitcoin ATM service), “The cryptocurrency insurance sector is relatively small but complex. Bitcoin and other cryptocurrencies are unregulated by the government, which means there are no rules for insurance. The price of cryptocurrency fluctuates day-to-day, which makes it difficult and expensive to insure.”

Final thoughts

The cryptocurrency space’s future growth and institutional adoption are undeniable. In November 2021, for example, the total market cap of cryptocurrencies surpassed $3 trillion. This rate of expansion is not likely to slow anytime soon.

New crypto-insurance companies are expected to emerge as the cryptocurrency industry evolves and expands. And we believe that this sector will soon thrive with a variety of insurance options for cryptocurrency holders.

It is recommended that you use reputable and trusted exchanges to keep your digital assets safe. To add an extra layer of security, you can store your funds in cold wallets .

Furthermore, experts advise starting small and dividing your portfolio among multiple crypto wallets. However, cryptocurrency is regarded as a high-risk investment. Never make a decision without first consulting with a financial advisor, and never invest more than you can afford to lose.

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