What Is Crypto Insurance?

What Is Cryptocurrency Insurance?

Cryptocurrency insurance provides coverage for virtual assets lost or stolen under specific circumstances. Most policies do not cover consumers unless their cryptocurrency is involved in an exchange hack or failure of its systems.

Learn more about this emerging type of insurance and what it does or doesn't do for commercial and retail cryptocurrency users and investors.

Understanding Cryptocurrency Insurance

Cryptocurrency insurance is a new type of coverage for the insurance industry, exchanges, and other crypto service providers. This type of coverage is being developed and introduced to provide financial protection for those operating and participating in the space.

As of December 2023, coverage isn't as comprehensive as other types of insurance policies because cryptocurrency and blockchain are still pretty new.

Most providers offer policies to cryptocurrency exchanges or other businesses with capital invested in cryptocurrency-linked operations. Customers are only covered in the event they are affected by a failure of the company's hardware, software, or services. For instance, if the exchange you stored your private keys on is hacked, and you lose all your funds, you might be covered if the exchange has a policy for that type of occurrence.

If you use a wallet the exchange supports—but didn't create or maintain—to store your private keys, you may be out of luck. There isn't any policy that protects consumers who hold their private keys themselves (yet).

Concerns About Crypto Insurance

One of the key issues with crypto insurance is that it is challenging to make policies fully comprehensive. Many different blockchain and cryptocurrency elements are still being analyzed and evaluated by insurance companies.

For example, cryptocurrency mining operations can be large, with vast arrays of expensive mining equipment. Each mining rig is expected to generate an estimated amount of income over its lifetime, which adds to its value. Because they are tangible equipment, mining rigs depreciate in value over time. Underwriters need to account for all expenses, depreciation, and expected income when creating insurance policies, but because the technology is so new, much of the information they use isn't available.

So, underwriters don't have well-established baselines to use when estimating values, premiums, and coverage types or options. With that said, the insurance industry is making progress as of December 2023. Companies like Evertas have studied the cryptocurrency industry and started offering more relevant insurance for businesses involved in the space.

However, insurance for retail cryptocurrency users and investors is still lacking. Some exchanges, like Gemini, contract an insurance company to ensure customer funds are insured if there is a breach or failure of its systems or applications. Some companies offer plans that cover lost or stolen crypto if the keys are held in a custodial wallet—such as an exchange's cold wallet. But as of December 2023, there are very few, if any, insurance providers for crypto users who store their keys themselves or use third-party wallets.

The Future of Cryptocurrency Insurance

Traditional insurance companies, with good reason, are hesitant to issue insurance policies to cover cryptocurrency losses. They have limited their coverage to cryptocurrency businesses with customers.

However, because centralized insurance is another target for blockchain projects, you can find many that claim to insure user's assets. There may be a few valid decentralized insurance apps and projects out there, but for the most part, these should be avoided because they are new. Also, the only way to find out if they are scams is to be scammed. It's better to wait and see how the industry addresses the issues.

Decentralized insurance, as it is defined in 2023, is risk sharing by network participants. One theory behind risk sharing through decentralized finance is that network participants could put up collateral that would, when combined, be enough to cover the combined risks all network participants bring.

Another is that decentralized insurance might only involve smart contracts that trigger when certain events happen. For example, if you stored your cryptocurrency keys at an exchange and they were stolen in a hack, a smart contract might automatically transfer funds into your exchange account without a claim process.

The Bottom Line

Cryptocurrency insurance is coverage for stolen or lost cryptocurrency. It will likely continue being offered only to businesses involved in blockchain or virtual assets. Customers of these businesses are covered in certain circumstances, but it is unlikely that traditional insurance companies will offer policies to retail users who don't use the services of covered enterprises. Emerging decentralized insurance applications might offer solutions, but it remains to be seen if they will ever be adopted.

The comments, opinions, and analyses expressed on Investopedia are for informational purposes only. Read our warranty and liability disclaimer for more info. As of the date this article was written, the author does not own cryptocurrency.