Crypto Wallet Insurance Guide for Beginners

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Over the years, the cryptocurrency market has expanded to include more than 40 million active users of at least one of the currencies.

However, unlike other financial assets that can easily be insured, cryptocurrencies have a lesser number of insurers. This is due to the high level of unpredictability that plagues cryptocurrencies.

As a beginner in crypto trading, how can you get insurance for your crypto assets? What do you need to know about crypto wallet insurance? This crypto wallet insurance guide will help you get started.

Is there any crypto insurance by the US government?

Is there any crypto insurance by the US government?

Although the United States has more crypto wallet companies and users of cryptocurrency, the government does not provide any form of insurance for crypto investors. The Federal Government of the United States only provides insurance for cash, stocks, bonds and other conventional securities.

The same thing also applies to the Federal Deposit Insurance Corporation, which is an independent agency of the federal government. The FDIC has provisions in place to provide insurance for at least $250,000 per person, per bank. This figure cuts across all savings accounts, money market deposit accounts and certificates of deposit.

Cryptocurrency is not included yet. However, it has plans to incorporate it soon with its program called the Crypto-Asset Policy Sprint. In partnership with the Federal Reserve and the Office of the Comptroller, the FDIC has been able to learn about cryptocurrency and formulate policies on how and when banks can engage in activities involving crypto assets.

The Securities Investor Protection Corporation is in charge of the insurance on deposits at brokerage accounts for the purpose of purchasing securities. According to the SIPC and FDIC, none of these insurance covers crypto assets.

This simply means that there is no federal protection for your cryptocurrency. As far as the government is concerned, you are on your own.

Is there any crypto insurance by the US government?

Why are there few crypto wallet insurance companies?

Most insurance companies are wary of cryptocurrencies because of their decentralized trading environment.

Since it is a sector that is still growing, it has little or no government regulations. This simply means that there are no rules for insuring. The price of cryptocurrency is hard to predict as it often fluctuates daily. This has a negative impact on any insurance policy making it difficult and expensive to insure.

Notwithstanding, there are still notable reasons why every cryptocurrency investor has to insure his assets.

1. Ever-increasing incidence of crime and fraud

Besides the continuous rise and fall in the prices of cryptocurrencies, there is the issue of crypto scams and fraud. There are countless stories of investors that have lost millions of dollars in their wallets to corruption, scam, and fraud.

In 2021 alone, the Chainalysis data showed that more than $14 billion in cryptocurrency was stolen. This is enough motivation for any individual to seek insurance. In other to meet the needs of their customers, exchanges have taken up the task of providing insurance against theft from cryptocurrency hackers.

2. Exchange Insurance

This is presently the largest insurance market in the crypto industry. The exchanges had to take up this role after several incidences of hacks which took down entire crypto exchanges were recorded in the past.

In 2016, the Bitfinex exchange was hacked and the perpetrators went away with about 119,754 Bitcoin tokens (presently worth $4.9 billion). That is not all, as Mt. Gox also lost almost 850,000 Bitcoin tokens (now worth more than $35 billion) to theft. With this insurance program, customers now have the advantage of recovering their funds whenever there is a hack.

The insurance policies also differ from one exchange to the other. Some work with third-party commercial insurance firms, while most exchanges prefer the traditional self-insurance practice.

The insurance program being run by these exchanges includes a small percentage of each transaction being added to a collective fund. The exchange-offered insurance has one major drawback, it only covers losses that come from cases of a platform-wide hack.

In addition, the total amount stolen must not be more than insurance recovery otherwise you might not get any help with recovering your losses. This insurance program is mostly offered by larger exchanges. There are some other crypto exchanges that do not offer any insurance coverage.

For instance, Coinbase which is one of the largest crypto exchanges has a  $255 million crime insurance policy, according to O’Connell. This coverage becomes activated when Coinbase is attacked by cyber fraudsters.

Other crypto exchanges that carry crime insurance are BlockFi and Bitstamp. BlockFi provides theft insurance through its primary custodial wallet, Gemini. While Bitstamp has a coverage of over $300 million. Its assets are also insured through the wallets it uses BitGo and Copper.

A total of 95 per cent of all its digital assets are stored in cold storage. This means that it is not connected to the internet and is more secure from hacks.

How to Get Crypto Wallet Insurance

How to Get Crypto Wallet Insurance

With all these structures in place, a cryptocurrency user can also put himself in an advantageous position by practising self-insuring. Here is how to get crypto wallet insurance:

1. Self-insuring

No matter what happens, it is noteworthy that the cryptocurrency market will always be a risky venture. So as an investor, you can protect your crypto investments by sharing your private keys with trusted, independent custodians. This can help protect your wallet from theft.

Another way to self-insure is to spread out your investments into multiple wallets. This can reduce your risk if anything goes sour.

2. Hot Wallets insurance program

Hot Wallet is another effective way to get insurance for your cryptocurrency. It is a kind of crypto wallet that always needs the internet to function and it 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. One of the most common examples of this company is Coincover, which is an insurance-backed protection platform for crypto investors underwritten by Lloyd’s of London for lost or stolen funds.

The crypto insurance services of Coincover covers some crypto wallet like Civic, BitGo, and Vesto. So if you are using any of these wallets, your crypto investments are safe. When anyone hacks into your wallet or steals your device, Coincover will cover up for the loss.

However, the amount that will be refunded depends on the protection level of the wallet you purchased. The Coincover protection does not come with all wallets. So ensure you check the fine print for any wallet you use to understand what protections are offered.

3. Personal Insurance for Cryptocurrency

Personal insurance for cryptocurrency is similar to traditional private insurance companies for Securities. Very few companies have this offer.

Crypto Shield is the first regulated insurance plan for personal crypto wallets. It is a crypto wallet insurance company based in Boston. The Breach Insurance covers 20 cryptocurrencies such as BTC, ETH, LUNA, SOL, and ADA. This service can only be assessed within four crypto exchanges: Coinbase, Coinlist, Gemini, and Binance US.

Third-party crypto wallets are not covered by the Breach Insurance plan. It offers a direct-to-consumer program. Presently it operates in 10 states, including Massachusetts, California and New York. You can only purchase a policy if you reside in one of the listed states. You have the option of choosing your deductible, either 5 per cent, 10 per cent or 15 per cent of the policy amount.

It only takes note of losses that result from hacks or exploitation in your exchange wallet. Assets ranging from $2,000 to $1 million are covered by this policy.

The cryptocurrency world will continue to grow and more individuals and institutions will likely adopt it. For example, in November 2021, the total market cap of cryptocurrencies surpassed $3 trillion. We should expect to see more of this at the end of the year 2022.

More cryptocurrency insurance companies will definitely join in the future. This will have a positive effect on the industry. It will cause more insurance options to be made available for cryptocurrency investors.

Disclaimer content is meant to be informational in nature and should not be interpreted as investment advice. Trading, buying, or selling of cryptocurrencies and digital assets should be considered a high-risk investment and you are advised to do your own research before making any decisions.

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