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The Cryptocurrency Insurance Gap

Author: Clement Gauvin

While the cryptocurrency market has skyrocketed over the last few years, the term cryptocurrency insurance remains relatively niche. The crypto currency market is often referred to as the Wild West due to the lack of regulation and lack of infrastructure. This has left cryptocurrency relatively untouched by the insurance industry, who have been deterred by the potential risks. However, where there are assets, there is also the demand for insurance. Consequently, there has been a disparity between the demand for cryptocurrency insurance and its supply. In 2019, only 10% of the $250 billion global crypto market was available for insurance. So what is stopping insurers from entering this market? What are insurers currently doing in the crypto domain? And how will the future of cryptocurrency insurance evolve? 

It is important to differentiate between the insurance of hot and cold wallets. In general there is a much higher demand for insurance on hot wallets than for cold wallets, as the latter is resistant to many risks faced by hot wallets. The risks that accompanying cryptocurrencies is well documented and repeatedly showcased by the media. In 2019, 12 cryptocurrency exchanges were hacked and around $300 million in crypto was stolen. Theft, fraud and hacking are only some of the risks faced by cryptocurrency exchanges. It is easy to why see the demand for insurance in this sector is growing. 

So what is holding insurance companies back from entering this potential market? First of all, the market volatility and relatively short or non-existent historical data and lack of structure makes cryptocurrencies hard to value for insurance companies. Furthermore, lack of regulation and the association of crypto with criminal activity further deters insurers who do not want to take on this unnecessary risk. Finally, there is a huge knowledge gap between crypto users and insurance companies. Insurance companies are still relatively new to the domain and so have not yet gained the same experience with the technology. 

However, in the last two years, insurance companies are finally catching up and closing the gap. They are creating different ways to calculate risk premiums and are in close contact with cryptocurrency exchanges and custodians, the primary customers of crypto insurance, to learn more about the technology. Cryptocurrency insurance is a sector that is abundant with start-ups, such as Coalition, which specializes on cryptocurrency insurance and has over 500 clients. Many other start-ups are entering the market, bringing with them specialized knowledge and a different take on traditional insurance. Coincover is another start-up that combines crypto exchange and insurance for the individual. Much like the early cryptocurrency scene, the cryptocurrency insurance industry is lead by many innovative start-ups. 

Certain big players are also already in the cryptocurrency insurance sector: Lloyds of London and AON both partnered with Coinbase in 2018. Coinbase is the largest crypto exchange in the world while Lloyds of London and AON are both insurance giants. Since 2019, Coinbase holds a $225 million insurance policy on its hot wallets. Many other exchanges such as BitGo have followed suit, taking up insurance policies on their hot wallets. Other large insurance companies have also expressed their interest to enter the market, such as AIG and Allianz and are expected to move into the market next year. 

In the future, experts agree that this is a growing market and that the gap will continue to close in the coming years. Ty Sagalow, former AIG director, believes the market will grow to a multibillion dollar size within the next few years. As insurance companies start to understand more about the market and more historical data becomes available, early adopters will have the first mover advantage while many others will follow. However, according to Ouriel Ohayon, CEO of ZenGO, this cannot happen without additional safeguards and regulations. Ultimately, the goal is to provide insurance to individual crypto holders themselves rather than the exchanges or custodians. To achieve this, the industry faces many challenges and must use innovative ideas to lower the risk of the cryptocurrency ecosystem. 

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