Insurance, cryptocurrency, and bitcoin

By Jiten Puri
CEO & Founder, Insurance Advisor, LLQP
6 ‏‏‎ ‎‎‎‎‎min read

With the amount of online chatter surrounding Dogecoin, Shiba Inu Coin and other similar meme-currencies, it would be easy to assume Bitcoin is going to the dogs. There’s absolutely no shortage of news on blockchains, cryptocurrencies, NFTs (non-fungible tokens), Bitcoin, and other topics in the blockchain space. Cryptocurrencies and Bitcoin especially have headlined technology and finance news for several years. As Bitcoin surpasses $1 trillion in market value, one should consider protecting their investments in this new technology. If you invest in cryptocurrencies, then finding an insurance policy to protect your investment is critical. 

This article explains the importance and challenges of insuring cryptocurrencies, what insurance policies are available in Canada, and whether you can go as far as to pay insurance premiums with cryptocurrencies.

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Why is insurance for cryptocurrency important?

In 2018, hackers found vulnerabilities in Coincheck, a Japanese cryptocurrency exchange, and stole over $500 million in coins. Coincheck is only one of the dozens of cryptocurrency platforms to face these hacks. In these hacks, some coin owners end up with a significant loss and are never compensated. 

The accessibility and anonymity of cryptocurrencies have made them a target for hackers, especially now as the values of coins such as Bitcoin and Ethereum hit record highs. A cybertheft on an exchange or platform can allow hackers to get away with millions of dollars in an almost untraceable format. Most cryptocurrency exchanges or “crypto wallets” have robust security measures in place, but risks remain. 

Hackers aren’t the only issue with cryptocurrency. There’s also the risk of negligence. The story of Stefan Thomas went viral earlier this year when the individual locked 7,002 bitcoin (almost $480 million CDN) in a hard drive to which he forgot the password. Thomas had used eight out of ten attempts to guess the password. If he failed all ten attempts, the encrypted hard drive would dispose of the coins forever. 

The risks related to holding cryptocurrencies prove the importance of insuring them. Insurance coverage can mitigate risks by compensating you for the value of your coins if you lose them due to cyber theft, negligence, or other circumstances

The challenges with insuring cryptocurrencies

Although cryptocurrency is supposed to be a decentralized currency, the Canadian Deposit Insurance Corporation (CDIC) has explicitly stated that it doesn’t insure them. Usually, the CDIC provides deposit insurance such that banking clients would still get their deposited money back even if a bank went bankrupt. 

One challenge for insurers is the lack of historical data relating to cryptocurrencies. Actuaries and other insurance professionals calculate insurance premiums based on historical data. For example, if you purchased life insurance, a person or algorithm would compare your health or pre-existing conditions, age, lifestyle habits, occupation, and other traits with similar people to determine the risk of your death. Insurers then calculate this risk into a monthly or yearly premium (what your life insurance costs). 

Because cryptocurrencies are relatively new and lack the historical data that insurance providers use to determine risk, it becomes hard to insure. Alternatively, an insurer may see the lack of historical data as an additional risk and charge an incredibly high premium. 

Insurance companies do a massive amount of underwriting for a single life insurance application, so imagine the work that might go into insuring a cryptocurrency. Although it’s hard to determine the risks related to a cryptocurrency insurance policy, it hasn’t stopped insurers from doing their research. Lloyd’s of London released a report in 2015 citing the insurance risks of Bitcoin.

Can I insure my bitcoin?

Yes, you can but it’s first essential to understand that traditional insurance policies (like homeowners insurance) may not cover cryptocurrency theft. Although property, cybersecurity, or crime insurance policies may sound like they cover situations like the loss of cryptocurrencies, insurers are careful to leave relatively new or unstable assets out of scope in such coverage (more on that below) while newer entrants are developing their own protection solutions.

Cryptocurrency exchanges are working with insurers on policies that benefit all parties. Recently, Bitbuy, a Canadian digital currency platform, worked with insurer Knox to create a comprehensive cryptocurrency insurance policy. The policy covers the risk of coin theft and loss, including theft by hackers or internal collusion. 

Bitbuy is only one example of a cryptocurrency platform insuring their users’ assets. There’s no doubt that other platforms are taking a similar approach to get their digital coins insured. Insurers may further protect coins through cold (physical) and hot (online) storage services.

Toronto-based commercial insurer Kase further provides individual cryptocurrency insurance. Their policy can secure your digital holdings in cases of criminal liability, cyber liability, and negligence. This covers losses due to cyber theft, internal collusion, mistakes by you or employees, and even natural disasters. 

So, even if you aren’t holding your coins through a secured platform, some insurers and brokers are creating solutions for this unique coverage need.

Does homeowners insurance cover bitcoin and other cryptocurrencies?

No, traditional homeowners insurance policies do not cover cryptocurrencies. If you want to protect your digital coins, you likely need an insured currency platform or a separate cryptocurrency insurance policy like those outlined above. For example, suppose you’re a Bitcoin miner, and you keep your coins on a hard drive. If a burglar steals this hard drive during a home burglary, an insurer may compensate you for the value of the actual hard drive but not the Bitcoin on it.

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Can you pay insurance premiums with cryptocurrency?

In Canada, it is not currently possible to pay insurance premiums with bitcoin or other cryptocurrencies. At the end of the day, the point of cryptocurrencies (and all currencies) is that we can use them to both save and spend. But one can’t spend crypto unless vendors begin accepting it instead of or alongside regular currency. So, could there be a future where insurers start accepting cryptocurrency as premiums? 

It’s possible – but perhaps still needs time to normalize. Although there’s no widely known Canadian life insurance company that accepts Bitcoin or other digital coins, AXA, an insurer based in Switzerland, now allows its customers to pay their premiums in Bitcoin. It’s likely that if demand for Bitcoin or other crypto payments rises, other insurers will follow suit. 

The relationship between cryptocurrencies and insurance is as complicated as blockchain and cryptocurrencies themselves. As the business world progresses with this new technology, we can envision insurers may one day adapt to this new payment system.

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By Jiten Puri
CEO & Founder, Insurance Advisor, LLQP
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