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Bitcoin & Crypto Insurance: Risks & Security

Jan 7, 2022

Bitcoin and other cryptocurrencies have been increasing in popularity in recent years and are becoming an area more people are looking to invest in. NFTs are the most recent crypto trend to take off and garner interest around the world.

But how can you manage the risks linked to these types of investments and what is the availability of bitcoin and crypto insurance like in the UK?

What is bitcoin and cryptocurrency?

Bitcoin and cryptocurrency are basically a form of online cash. A totally virtual currency.

Stored in a digital wallet they are a computer file. Bitcoins are created through a process called mining which requires a large amount of computer processing power, and it can take years to create just one bitcoin.

Each bitcoin transaction is recorded in a public record called blockchain. This makes it difficult to copy, fake or spend bitcoin which you don’t own.

Today, 1 bitcoin is worth around £34,000

What risks do investors in cryptocurrencies face?

This piece from the Financial Services Compensation Scheme (FSCS) looks at some of the key risks that investors in cryptocurrencies may face including:

  • Theft
  • The risk that you will lose access to your investment – as they are stored digitally if you lose/forget a password etc you lose your investment
  • The volatility of the price of cryptocurrency
  • Cryptocurrencies aren’t widely accepted so spending your investment will prove difficult
  • Cryptocurrencies are largely unregulated meaning there is no easy way to get your money back if funds are stolen and that scams can be difficult to spot
  • Cryptocurrencies aren’t generally protected by organisations such as the FCA or FSCS meaning you get none of the protections which these organisations provide for other financial products

What is bitcoin and crypto insurance?

Given the risks associated with investing in cryptocurrencies it may make sense to invest in insurance to protect against these risks. Particularly given that you are unlikely to receive many of the protections afforded by organisations such as the FCA or FSCS.

Coverage in the market isn’t widespread currently given that cryptocurrencies are still relatively new and the risks complex. We know historically that the insurance market can be slow to catch up to new technologies and developments!

Lloyds of London now offer a cryptocurrency wallet insurance product in conjunction with Coincover. They state that their product is designed ‘to protect against losses arising from the theft of cryptocurrency held in online, hot wallets.’

Launched in 2020, the product provides a dynamic limit which mirrors price changes of crypto assets so that the level of insurance is always adequate.

But aside from this product from Lloyds and Coincover it is hard to find many more examples of insurance in the cryptocurrency market.

Of course, as people continue to invest in these new technologies and the definition of what is deemed valuable continues to shift, the insurance market will need to catch up and innovate.

In the absence of widely available designated insurance coverage for cryptocurrency investments, then make sure you are aware of possible vulnerabilities linked to your assets. You must acknowledge your personal cyber risk, understand that cyber security will become a necessity and take the best possible steps to minimise your cyber risk.

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