What is Cryptoinsurance: Secure Your Digital Assets
Over the past few years, cryptocurrencies have become one of the significant ways of investment. On the downside, these digital assets are not safe from being stolen, and investors are looking for ways to acquire coverage against the loss of investments and many other threats. This article will delve into the world of crypto insurance and discover its importance.
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Why Does Cryptocurrency Need Insurance?
Cryptocurrencies are a relatively young and emerging market. Therefore crypto investors are exposed to different risks and threats and have very few options for insurance. Unlike ordinary currencies such as the euro, the Japanese yen, or the U.S. dollar, cryptocurrency is a digital currency that works as a medium of exchange and uses cryptography to secure transactions.
It operates in a decentralized manner, without the need for a government or bank, which makes it even more vulnerable to cyberattacks. That being the case, crypto owners and financial institutions working with digital assets will need crypto insurance.
Crypto insurance is a policy that protects investors against the loss of tokens in case of unpredictable events, such as cyber-attacks and hacks. It allows crypto owners to grow their investments with peace of mind, not worrying about them getting stolen.
Although the demand for crypto insurance is rising, most insurance companies remain hesitant to enter this unpredictable industry because of the technical complexities since many unforeseen problems may arise. However, newer startups and insurance companies offer some guidance and do everything to safeguard digital assets against theft.
What Are the Risks of Investing in Cryptocurrency?
Cryptocurrencies went mainstream, and, as expected, they also attracted huge criminal interest. Every investor must consider the possible risks before investing in cryptocurrencies. Significant risks, such as volatility, decentralization, and loss of private keys, are a few of many unpredictable harms that can take place in this industry, which has also become hackers’ and internet criminals’ favorite hunting ground. Listed below are significant threats and risks that investors must be aware of:
Cybertheft and Hacking
Day by day, cybercriminals are finding new ways to steal your digital assets. Since cryptocurrencies are not regulated by the government or banks, transactions and exchanges can’t be monitored. Because of its abstract nature and the instability of the cryptocurrency ecosystem, cryptocurrencies are vulnerable to cyberattacks, meaning that digital coins such as Bitcoin, Ethereum, and Tether are not safe from theft in the virtual space.
In 2021, internet criminals stole $3.2 billion worth of cryptocurrency, according to Chainalysis. Over $1.3 billion worth of digital coins have been stolen from investors only in the first three months of 2022. These numbers continue to rise every day, as hackers have the opportunity to access trading platforms and cryptocurrency wallets in the easiest way possible, using a variety of cyberattacks.
One of the most common cyberattacks in the crypto industry involves ransomware. Ransomware is malware in which hackers threaten to publish a victim’s data unless a ransom demand is paid. Why do they demand payment in cryptocurrencies, you may ask? Well, cryptocurrencies allow them to receive funds while staying anonymous. So, they demand cryptocurrencies, such as Monero and Zcash, to make transactions difficult to trace.
Many crypto holders have lost everything because of scams. Scammers use different hacking techniques, such as email phishing, fake coin offerings, and giveaways. Phishing is one of the most common techniques scammers use to access users’ accounts and card information. They try to steal their targets’ credentials by creating and sending them different ad campaigns. Without realizing it, crypto holders click on a malicious link that they have received through email and give away their details to scammers.
Rug pulls are another common type of scam in cryptocurrency. Its name comes from the expression “pulling the rug out.”
Basically, crypto developers create a new token, attract investors, pump up the price, then abandon the project and run away with the investors’ funds, leaving them with worthless currency.
Loss of Private Keys
Crypto investors use crypto wallets to keep their funds safe from hacks. When they open a crypto wallet, they are given a private key, a unique and secure code in cryptography, just like a password. This private key allows them to make transactions and prove blockchain address ownership. More importantly, they help users keep the funds in their wallets safe from theft and unauthorized access.
Unfortunately, it’s not hard for hackers to steal crypto owners’ private keys. Most of the time, these private keys are kept in digital repositories, which gives hackers a big opportunity to access any funds in the wallet and steal them. And what’s worse, private keys can not be recovered or regenerated.
Transaction malleability is an attack that lets someone change a transaction’s unique ID before it’s confirmed or validated by the Bitcoin network. This has been one of the biggest threats to blockchain technology ever since 2011. But how does it work, and is it an inevitable issue? To understand the problem of transaction malleability, let’s examine the process of sending and receiving transactions.
Confirmed transactions are stored on the blockchain. They contain information, such as the transferred amount of money, the address from which they were sent, and where they’re going. But most importantly, they have a unique identifier, also called transaction hash, which allows them to be referenced in the blockchain. Transactions also have digital signatures, but once it’s changed in the unlocking script before confirmation, the transaction’s ID will also change and make the previous ID invalid. This allows attackers to claim that the transaction is invalid and acquire more and more cryptocurrencies.
What Does Crypto Insurance Cover?
The crypto insurance industry and its policies are still new, and many assets are not protected. However, crypto insurance providers offer insurance policies on cryptocurrencies stored in wallets and protect them from platform hacks and against hacking, phishing, theft, malware, and other attacks. Generally, these policies do not cover direct hardware loss and transfer to cryptocurrency to a third party.
Most insurance policies are designed for crypto businesses that invest in cryptocurrencies through corporate crypto exchanges. They cover external and internal causes, unauthorized access to personal accounts, and mistakes.
Crypto Insurance Policies
As stated above, crypto insurance policies are mainly designed to protect crypto wallets and exchanges and provide coverage against cyber attacks and security threats. Insurance companies are taking their first steps into the world of cryptocurrencies to solve the problems that can lead to huge disasters. Many other policies that feature protection against loss of private keys and problems that occur because of a service shutdown are still in development.
The products available in the crypto insurance market are pretty expensive. When considering purchasing insurance policies, you must understand what coverage you need for your assets.
Now, let’s look at the different types of policies corporations that provide cryptocurrency storage and exchange services can purchase to safeguard their digital assets.
Cyber and Crime Liability Insurance for Crypto
Every corporation, small or large, is at an inevitable risk of getting targeted by cybercriminals. The bigger the company, the higher the risk of being targeted. With that being said, cyber liability insurance is the first and most essential policy you must consider.
When a hacker gains access to a crypto holder’s wallet and steals the funds, there is no bank to cover the losses. This is when the crime liability policy steps in. It provides coverage in cases such as hacking and malware and helps recover confidential data. We must mention that this policy offers financial resiliency only when the funds get stolen from “hot” wallets, which are connected to the internet.
Specie Insurance for Crypto
Specie insurance policies mainly focus on the theft and destruction of digital assets and protect cryptocurrencies that are stored in “cold” wallets. These wallets are considered more secure locations, but they still need coverage, as they store keys that crypto holders are not frequently using.
Before purchasing specie insurance, companies must consider that these policies depend on the cause of theft because, as we have already mentioned, these policies only provide coverage if the affected party can prove the losses. They do not cover hacking.
Directors and Officers for Crypto
The next insurance policy is D&O, which protects you and your executive team against allegations from investors, vendors, customers, and even employees. Cybercrime events can have serious consequences for the directors and officers of the afflicted entity, such as regulatory and criminal investigations. Directors’ and officers’ insurance provides coverage for these kinds of accountabilities.
Errors and Omissions Insurance for Crypto
An Errors and Omissions (E&O) insurance policy, also known as professional liability insurance, is designed to protect you from claims of negligent acts, errors, or omissions. These are very likely to happen since large corporations in crypto rely on technology, and even the smallest errors can result in a substantial financial loss.
Decentralized Finance (DeFi) Insurance for Crypto
It’s a new and popular market. DeFi is a financial system, an emerging field that lets participants make financial transactions directly with others without the help of brokerages, banks, or exchanges. The name itself already suggests that it’s an alternative to traditional “centralized” financial services. DeFi is available on public blockchains – most often Ethereum.
But just like everything else, the DeFi market is not safe for investors. According to Chainalysis, DeFi platforms have been the main targets of cyberattacks, accounting for 97% of the $1.7 billion stolen in 2022 and these thefts continue to occur every day. This is when the need for some insurance becomes vital. DeFi insurance provides coverage for potential financial loss. The prices and policies of insurance providers vary based on cover type and duration. It all depends on the unpredictable events you need to get protection for.
The DeFi industry is growing at a rapid rate and the demand for insurance providers is on the rise as well. Here are some examples of the best DeFi insurance protocols that protect users from investment losses in the platform.
InsurAce is the leading decentralized insurance protocol that provides secure insurance services to DeFi users and protects their investment funds from various risks emerging from smart contract exploits and hacks, that constantly happen on the platform.
InsurAce offers users the products with the lowest insurance premiums on the market. It has deployed on Ethereum (ETH), Binance Smart Chain (BSC), Polygon (MATIC), and Avalache (AVAX) smart chains. All you need to do is choose the network and connect your wallet to the InsurAce application and purchase covers.
Nexus Mutual is one of the most popular decentralized insurance protocols. It’s an Ethereum-based platform, a blockchain project that safeguards the crypto portfolio of users with insurance. Launched in 2019, Nexus Mutual offers a product called Smart Contract cover that protects users against a smart contract bug and guarantees a payout in ETH or DAI if a smart contract bug is ever discovered in the DeFi app.
The yearly cost of this product is 2.6%. When buying the product, you must choose the type of cover you want. Nexus offers three types, including Yield Token Cover, a Protocol Cover, and a Custodian cover. It’s also important to mention, that Nexus Mutual became the first Defi insurance protocol to safeguard funds deposited in centralized finance (CeFi) services.
Another example of a significant decentralized insurance protocol is Solace. Operated by the Solace DAO (Decentralized Autonomous Organizations), Solace offers coverage for Ethereum (Ethereum Optimism), Fantom, Aurora, and Polygon chain users. This decentralized insurance protocol protects liquidity providers from risks emerging from smart contract exploits and provides insurance policies for re-entry attacks, fake trojan tokens, flash loan attacks, proxy manipulation, and minting vulnerability.
Do Crypto Exchanges Offer Insurance?
The short answer is yes. Some crypto exchanges may offer insurance to their users. However, it must be noted that their cryptocurrency insurance policies cover losses that have taken place due to platform hacks. They do not cover individuals who have lost their funds resulting from unauthorized access to their accounts. Users must have strong passwords to avoid getting hacked on the trading platform.
Coinbase, one of the largest crypto exchanges for buying, selling, storing, and transferring cryptocurrency, carries a $255 million insurance policy for its hot wallet crypto holdings. It protects users’ funds against losses from theft and cybersecurity breaches only.
Some exchanges work with insurance firms to carry policies. Bitstamp, another digital asset trading platform, has expanded its crime insurance policy. This policy is offered by Paragon International Insurance Brokers and applies to cryptocurrencies stored at the Bitstamp platform, both online and offline. You can also keep your digital assets in Bitstamp’s wallets.
The Future of Crypto Insurance
Cryptocurrency is not a legal tender, and it has never been backed by the government or insured by FDIC (Federal Deposit Insurance Corporation). That being the case, investing in crypto has always been highly risky for both large corporations and individuals. In over a decade, cryptocurrency has gone from a new phenomenon to a much more mainstream form of finance and investment.
Additionally, users have been the only possible responsible ones for their digital assets. That was until the rise of cyberattacks, which continue to grow in frequency and complexity. Although blockchains were designed to reduce the risk of trading platforms getting hacked, the rise of cyber crimes changed everything. Now, the importance of crypto insurance policies is more important than ever.
The future of crypto insurance is hard to predict since the crypto industry itself faces constant changes. But cryptocurrencies become relevant each and every day, and they are here to stay, and so are the potential risks and threats that continue to take over the trading platforms at a rapid rate.
As cryptocurrencies become more popular, investors and large corporations, who remain the main target of cybercriminals, want to have coverage for their digital assets, not worrying about them getting stolen. That being the case, more and more insurance companies will start taking the risk to serve the industry and safeguard users from internet criminals.
Nowadays, cyberattacks and hacks are inevitable in the crypto industry. While internet criminals think of finding new ways to trick you and take away your investments, the best you can do, is be aware of them, invest wisely, find the best solution to ensure the safety of your digital assets, and consider purchasing crypto insurance policies as soon as you possibly can.