With more than $3.8 billion worth of crypto assets stolen in 2022, owners of Bitcoin (BTC-USD) and other cryptocurrencies are more aware than ever of the perils of leaving their digital wallets unchecked. Comprehensive crypto insurance solutions can mitigate the risk of increasing hacks and exploits, but a significant portion of the crypto ecosystem is not aware of available insurance options.
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Unlike traditional assets, cryptocurrencies are exclusively digital assets, mostly held in digital wallets, making them prone to hacks and exploits. Crypto transactions run in the digital world, giving hackers and other malicious actors a way to intercept without any physical requirements.
From smart contract bugs to protocol vulnerabilities, the crypto ecosystem has no shortage of risks associated with bleeding-edge technologies. On top of that, blockchain transactions are irreversible, meaning that if a cybercriminal gains access to a user’s private keys and makes a transfer, recovery is virtually impossible.
So, it’s no wonder that losing their crypto wallet via theft or social engineering attacks is the biggest concern of crypto users. According to surveys conducted by crypto insurance provider FairSide, 53% of crypto holders see wallet theft and phishing as one of their top fears. As a relatively new trend aimed at addressing such concerns, crypto insurance protects crypto wallets against losses caused by a variety of reasons.
How Does Crypto Insurance Work?
Similar to traditional insurance products, crypto insurance provides reimbursement to wallet owners when assets are lost. When an incident such as a theft or an exploit occurs, the crypto holder files a claim with the insurer, who then assesses the claim, verifies the losses and compensates according to the agreement.
For the most part, crypto insurance operates just like traditional insurance, taking a premium to provide compensation if a loss occurs. However, crypto insurance shows the difference when it comes to the digital-only nature of the assets covered, the significant volatility of asset value and the risks covered.
Exchange Wallets vs. Self-Custody
Crypto insurance works differently between exchange wallets and self-custody wallets. Exchange wallets are created by crypto trading platforms, like Binance (BNB-USD) or Coinbase (NASDAQ:COIN), for each customer and crypto assets are stored there on behalf of the user. Different exchanges have different insurance mechanisms to provide compensation in case of a hack or theft.
For example, crypto exchange Binance is known for having a large pool of emergency funds, named SAFU (short for Secure Asset Fund for Users), that holds over $1 billion to reimburse its customers in the event of an attack.
Self-custody wallets have started getting a new wave of users as centralized crypto exchanges experienced different problems in 2022 and peaked following the FTX collapse. As the name implies, self-custody wallets leave all control and responsibility in the hands of the wallet owner. Wallet management requires extra care and meticulousness, with the risk of phishing or other social engineering attacks lurking around every corner.
Insuring a self-custody wallet leaves fewer options for crypto holders. The same survey mentioned earlier revealed that 94% of respondents had difficulties finding comprehensive coverage. Furthermore, almost one-third of the participants highlighted that most existing crypto insurance products only cover certain cryptocurrencies, leaving lesser-known coins or tokens vulnerable.
Crypto Insurance Providers
Truth be told, there aren’t many options for crypto holders looking to insure their wallet, be it an exchange wallet or a self-custody one. One can expect the offering to increase in years to come, but due to the challenges described above currently, the selection is limited at best.
Fairside, a decentralized finance platform, offers crypto insurance with blanket coverage via a membership. It offers protection against risks involved in self-custody wallets, DeFi protocols, and third-party practices for users. Personal Wallet Theft provides blanket coverage of all crypto assets.
CoinCover is another crypto insurance provider covering users against hackers, fraud and human error. It works with Lloyd’s of London for insurance underwriting. The platform features solutions for institutional crypto services, exchanges, and wallet services.
Crypto owners’ protection needs change drastically based on how they use and store their assets. Crypto traders interact with their wallets quite differently than long-term investors, and individual cases might need a different approach compared to business claims. All in all, it’s crucial for crypto users to conduct their own research to find the crypto insurance that suits their needs in order to minimize the risk of loss.
