The Good, The Bad, and The Ugly of Digital Currency - Part 2
Updated: Aug 1, 2022
Safety: Insurance Smoke & Mirrors
This series of articles are intended to shine a light on all the bullshit out there about digital currency investment in your self-directed IRA.
Insurance Smoke and Mirrors
Investors who own conventional securities like stocks, bonds and mutual funds can rely on protective regulations and insurance backing, either through U.S. government or private policies. Investors in digital currency, however, do not have the same level of protections.
While there is demand for digital currency insurance to cover everything from deposits to theft, the primary concern is underwriting risks and whether the policy will ever pay out a claim. Major insurance companies struggle to accurately assess risk factors due to the lack of rules and regulations in the digital currency industry.
Given this level of unpredictability in a developing industry, how do you know if your digital currency is safeguarded?
Let’s take BitcoinIRA as an example. They brag on their website as having 100,000+ active users on their crypto IRA platform and as you click through the site you will find their insurance disclosure. Up to $700 million in custody insurance (can you also see, “that amount could vary” which is in tiny 6 point font). So now, let’s do the math. If they have 100,000 users (and keep in mind they had a plus sign after the 100,000 users) and each user had 1 bitcoin at $40,000 in value that would equate to $4,000,000,000 in insurance coverage needed. $4 trillion and they have $700 million. In most instances a breach in security affects the majority, not the minority. That would be like having full auto insurance coverage on your Tesla valued at $90,000 and you receive $15,750 from the insurance company in replacement value.
Sourced from Bitcoin Ira website https://bitcoinira.com/?AID=1175 Yes, private insurance exists for digital currency but it is extremely limited. The type of private digital currency insurance that exists today are not currently targeted for consumers, but are mainly bought by exchange platforms. The coverage includes crime and theft, custodial insurance coverage, business insurance, and more types in development for decentralized finance (DeFi) that would provide coverage for loss of funds due to lost private keys. Given this unchartered territory, it will be interesting to see if this type of insurance policy will ever payout on a claim filed given the provability factor. Then there is the factor that only certain coins in certain states qualify for these coverages. Let’s just say there is a lot of fine print disclosures associated with these insurance policies and even more exemptions.
Sourced from Coinbase website https://help.coinbase.com/en/coinbase/other-topics/legalpolicies/how-is-coinbase-insured
With that being said, there are some exchange platforms that are now offering the purchase of an
insurance-backed digital currency protection plan for lost or stolen funds at a cost to the consumer. Again, read the fine print as the coverage may vary by coin, state you reside, and limitations of
The moral of the story here is that the insurance claims being made come with fine print so the protection may be limited. Coinbase says it best, "total losses may exceed insurance recoveries so your funds may still be lost” and they do not put it in fine print.
Let us stop here for a moment. Regulators, law enforcement, insurance companies, and exchange/trading platforms realize they need some oversight or governance to further the digital currency industry making it more mainstream. This is ironic considering the concept of decentralization and the purpose behind the digital currency blockchain technology movement was to decentralize. Now they realize that government involvement is necessary.