A lot of money lost in the crypto winter? Here’s how to insure your cryptocurrencies
Investing in cryptocurrencies carries certain risks.
Investing in cryptocurrencies comes with certain risks. Here’s what investors can do to protect themselves from total loss.
Cryptocurrencies remain a high-risk investment category. From hacks to sudden price drops, there are many ways investors can lose their coins — and their money. The recent collapse of the Terra network has driven many retail investors to ruin. To protect investors against total loss, several service providers like Opium Finance or the InsurAce.io Protocol are now offering insurance that covers specific risks. Here’s a quick overview of the risks investors can insure.
1) Protection against crypto exchange hacks
Most investors keep their cryptocurrencies on trading platforms like Binance, Anycoin Direct, Coinbase, or FTX. While exchanges are considered secure and are repeatedly touted as protected against various risks, investors can still obtain separate protection. The minimum insurance amount and term vary by provider and capacity.
For example, if a crypto exchange or broker falls victim to a hacking incident, the insurance kicks in and compensates investors if the exchange can’t cover the damage itself. Some policies also offer protection against payout suspensions.
2) Stablecoin De-Peg Insurance
In the volatile crypto market, investors value stablecoins for price stability. Crypto prices are pegged to other assets like the US dollar or the euro, representing this at a 1:1 ratio. Consequently, a decoupling from the underlying asset would be disastrous for stablecoins, as shown by the recent Terra Stablecoin UST example.
But investors can take precautions to guard against such a “de-pegging event.” There is the option to buy insurance against such a de-peg. If the stablecoin trades below a certain threshold for an extended period (e.g., 10 days) (e.g., 0.92 USD), the policy activates and the insured is compensated 1:1.
The Terra debacle has fueled demand for these policies: on InsurAce, all stablecoin insurances are currently sold out. According to the platform, during the Terra crash it paid out about 12 million USD to victims.
3) Protection against smart contract hacks
Attacks on smart contracts are still common in crypto. Recently, the Ronin Chain hack (the blockchain behind Axie Infinity) grabbed headlines. Overall, attackers stole more than 600 million USD in cryptocurrency.
To cover damages from exploits and hacks, several crypto insurers offer policies that cover exploitation of vulnerabilities in smart contracts. If an investor loses crypto that was deposited in a smart contract during a hack, InsurAce, for example, reimburses the loss at the moment of the incident—minus any recoveries via the smart contract protocol.
Some insurers also offer standalone packages where different risks can be covered. The upside: the insured gets all coverage in one contract. The downside is that minimum insured amounts are usually quite high (InsurAce, for example, starts at 500,000 USD).
