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Opinion: Crypto insurance is almost non-existent, so you’ll have to rely on common sense


If your bitcoin could catch on fire – literally – it could have a chance of being covered by insurance.

For property, fire is a direct hazard. But that’s probably the single most important thing that can’t happen with a digital currency among the many missteps — see FTX, BlockFi, and other failures.

As it stands, there isn’t much protection for electronic money — no FDIC or SIPC insurance from the U.S. government to protect against institutional failures, no extensive coverage under property homeowners insurance, and very little coverage for the theft of private networks. Some exchanges have big policies for themselves.

With established brokers including Fidelity Investments enters the crypto marketand discuss about potential regulation of the Securities and Exchange Commission, this situation is subject to change. But for now, you are the guardian of your cryptocurrency, and your best defense is to be aware of the potential harms and how you can best protect yourself.

“You will never be able to eliminate all the risks. But you can see if there’s some low hanging fruit to make it a bit safer,” says Michael Menapacea non-resident scholar at the Insurance Information Institute, as well as an attorney and law professor.

These are the top things you need to think about to protect your crypto:

Loss of value

Bitcoin
BTCUSD,
-0.16%

and ether
ETHUSD,
-0.48%

has dropped more than 60% this year and no insurance company can do it. “Cryptocurrencies are extremely volatile and investors should only allocate funds that they are willing to lose,” Fidelity said in a statement to its potential crypto investors.

But you can be strategic about other crypto-related investments of your choice to avoid complete losses, such as sticking with established coins, investing in ETF products related to cryptocurrencies or using hedging strategies.

institutional failure

FDIC Insurance protects individuals from the collapse of banks. SIPC in contrast, insurance protects against the failure of securities firms regulated by the SEC.

How it works at companies like Robin Hood hero
HOOD,
+1.12%
,
Coinbase
COIN,
+1.75%
,
Gemini, honest and others that they partner with regulated financial institutions to offer cash-out accounts that receive FDIC insurance or SIPC through, depending on application.

But that’s only if it’s cash. Once your assets are in crypto, they are not insured against institutional failure. As Fidelity specifies: “FDIC insurance protects against loss in the event that cash cannot be stored; it does not protect you from loss in the event of a failure of Fidelity Digital Assets.”

However, Menapace sees large players entering space as a way for individuals to potentially protect themselves. These companies, regardless of their crypto division, are “typically highly liquid, highly regulated companies that will have assets to pay if something goes wrong,” he said. That terrible thing happened.”

Institutional theft

If your cryptocurrency is being managed by a large financial company and it is robbed, you may feel more relieved. Most of the larger players have “theft” policies, many of which are underwritten by Lloyd’s of London.

For example, Robinhood says: “We offer crime insurance that covers a portion of cryptocurrency held on our storage systems against losses due to theft, including security breaches. cybersecurity.”

But if you’re the only one being robbed, you’re almost alone.

Coinbase says it “provides crime insurance to protect a portion of digital currency held on our storage systems from losses resulting from theft, including cybersecurity breaches.” . However, our policy does not cover any loss resulting from unauthorized access to your personal Coinbase or Coinbase Pro account(s) due to a breach or loss of your login information.”

Direct theft

The IRS defines cryptocurrencies as property for tax purposes, but that does not apply to homeowners insurance, which will cover a stolen television. It also probably won’t extend to how a homeowner’s policy deals with stolen cash, but it depends on the policy. In any case, stolen cash claims are usually limited to no more than a few hundred dollars, a fraction of a bitcoin.

Menapace sees the most likely solution to this situation coming from the SEC, which could eventually designate cryptocurrency as a security and regulate it like a security.

“It’s not a panacea either,” Menapace said. “The next question is if the SEC regulates cryptocurrencies as securities, does that mean they will be insured or not insured like securities?”

There are some special policies for cyber theft, with many warnings. ViolationFor example, it started offering the Crypto Shield product in February to protect assets held in an eligible exchange if they are completely stolen or suffer a data breach at a watchdog. The cost to insure is about 1.5% to 2% of shares, said Eyhab Aejaz, CEO of Breach. A website quote for 1 bitcoin coverage in New York is $27 a month for 100% coverage to the day’s value, with a 15% deductible.

However, if you keep your cryptocurrency in cold storage — which means it’s under your own control on a hard drive or similar device — then you’re all alone. This is where you need common sense the most. Use digital safety best practices, such as enabling two-factor authentication, whenever possible. Coinbase recommends a code generator or two-factor key, strong passwords, no password sharing, ensures you have a good old plan for your digital wallet information, and possibly most importantly, your physical door lock. Friend.

Do you have a question for the “Fix my portfolio” section about the mechanics of investing, how it fits into your overall financial plan, and what strategies can help you get the most out of your money? me? you can write to me at [email protected].

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