With each passing month, cryptocurrency is gaining acceptance as a major investment opportunity for millions around the world. However, investing in cryptocurrency comes with its own share of risks. So, it is best to draw insurance on it.
Crypto insurance may not be as simple as other forms of insurance, such as those covering risks associated with life, health or valuable objects. Additionally, insurance companies have not been very open about the highly risky crypto market, for obvious reasons such as difficulty in understanding blockchain’s technical complexities and the lack of insurance-specific definitions of key components around digital assets.
Yet the tide is changing; some big names in the insurance world are gradually getting into the game of insuring digital currencies.
Why is crypto insurance necessary?
Image: Courtesy of Kanchanara/@kanchanara/Unsplash
Crypto insurance is like any other insurance policy — its primary goal is to provide a cover against the loss of tokens. However, it warrants a unique insurance scheme because cryptocurrency is not a legal tender and the factors affecting it are distinct from other payment or investment systems such as bonds, stocks and bank deposits.
Major factors that affect the blockchain, especially digital currencies, include volatility, hacking and scams.
Volatility
Cryptocurrency is extremely volatile. The fluctuations in the cryptocurrency market can be drastic in a single day or over some months for any reason — from government decisions to a tweet by an influential person such as Elon Musk. For instance, the worth of one Bitcoin, the oldest and the most valuable of all cryptocurrencies, was just over USD 67,000 on 8 November 2021. By 14 June 2022, it was trading at a little over USD 22,000 — a drop of around 67 percent in seven months.
This volatility is primarily because cryptocurrency is very new to markets and most of the world’s biggest economies are in a dilemma over its absolute acceptance.
However, this is just a part of the concerns investors have about securing the money they have pumped into crypto.
Hacking
One of the biggest threats to the world of crypto comes in the form of hacking. There have been numerous cases of hackers infiltrating cryptocurrency exchanges and stealing digital currencies worth millions.
In 2020, hackers stole cryptocurrency worth USD 200 million from a Singapore-based crypto exchange, KuCoin. The largest recorded hacking incident took place in August 2021 when USD 610 million disappeared from DeFi site Poly Network. Most of that amount was, however, returned by the hacker the same month.
The second biggest hack was as recently as 23 March 2022 when USD 540 million worth of cryptocurrency was stolen from blockchain project Ronin.
Additionally, hacking has led to the collapse of exchanges such as Japan’s Mt Gox.
And unlike stolen real currency which can be controlled by blocking the accounts of the thief, stolen cryptocurrencies come with another law enforcement impediment: it is impossible to obtain stolen tokens from a hacker without a private key. This is exactly what happened when, in October 2021, an 18-year-old hacker stole assets worth USD 16 million from the cryptocurrency platform Indexed Finance and disappeared. Despite knowing who he is, nothing concrete could be done.
Scamming
A 3 June 2022 report by the US Federal Trade Commission (FTC) revealed that over 46,000 people have reported losing over USD 1 billion in crypto to scams between 1 January 2021 through 31 March 2022. This was higher than any other payment method, FTC noted. The US government …….
Source: https://www.prestigeonline.com/hk/pursuits/wealth/everything-to-know-about-cryptocurrency-insurance/