Crypto insurance: What is it and why do we need it?

Insurance companies are cautiously entering the cryptocurrency market, offering limited coverage that addresses certain scenarios but not all. Cryptocurrency insurance typically covers virtual assets that are lost or stolen under specific conditions. For example, if the exchange where you stored your private keys is hacked and your funds are stolen, you may be covered—provided the exchange has a policy for such incidents.

However, if you store your private keys in a wallet not created or maintained by the exchange (also known as a non-custodial wallet), you might not be eligible for coverage. As of now, there are no insurance policies that protect consumers who hold and manage their private keys independently.

If a crypto exchange goes bankrupt, insurance provides minimal protection, as customers are usually last in line for any payouts. To better protect your funds, you could use a non-custodial wallet where you control the private keys. However, this approach places all the responsibility on you.

Crypto and blockchain systems operate on the principles of decentralized finance (DeFi), which aims to enable financial transactions without relying on banks or other intermediaries.

Within the crypto space, there’s also the concept of decentralized insurance. This model involves participants sharing risks with one another in a decentralized manner rather than relying on centralized entities for risk management, as is the case with traditional insurance.

Decentralized insurance allows users to receive coverage through smart contracts, which are automated programs that execute agreements when specific conditions are met. For instance, if your cryptocurrency keys stored on an exchange are stolen, a smart contract could automatically transfer funds to your account. These concepts are still in their early days, and they will continue to evolve as time goes on.

Exchanges including Coinbase and Gemini carry commercial crime insurance to protect against breaches or system failures within their platforms. Robinhood offers crime insurance covering assets for theft and data breaches. Similarly, Crypto.com provides insurance against physical damage, destruction, and third-party theft.

Evertas is the world’s first crypto insurance company offering a variety of products. Blockchain and crypto insurance companies like Superscript and Breach are also popular, among others.

Crypto insurance policies can be expensive. That’s primarily because the absence of regulatory oversight and uniform security standards for hot and cold storage complicates insurers’ risk assessment. Individual crypto insurance can generally cost around 2.5% of the investment. For example, insuring $10,000 worth of cryptocurrency could cost $250.