Bitcoin Insurance Explained: A Beginner's Guide to Protect Your Crypto Investments

As a bitcoin holder, you've likely experienced the anxiety from the ups and downs of the crypto market. But beyond price volatility, there's a more insidious risk that keeps many bitcoin owners up at night: the possibility of losing access to their bitcoin keys. Whether through hacks or solvency issues at custodians, violent attacks, or personal errors during self-custody, the threat of permanent bitcoin loss is real. This is where bitcoin custody insurance enters the picture, offering a safety net in the wild west of digital assets.

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Understanding Bitcoin Insurance

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Custody insurance is a specialized financial product designed to protect bitcoin holders against various risks unique to the digital asset space. Similar to traditional property insurance, bitcoin insurance can provide protection against loss due to a variety of causes. While bitcoin is a digital and decentralized asset, its keys must be physically held in some manner and thus the storage of the keys including its physical storage and the procedures to access it can be insured.

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The Need for Bitcoin Insurance

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1. Increasing Crypto Crime: In 2023, crypto-related crimes amounted to $20.6 billion, according to Chainalysis. This staggering figure underscores the very real threat of theft and fraud in the crypto space.
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2. Exchange Vulnerabilities: The collapse of major exchanges like Mt. Gox and FTX has highlighted the risks of centralized platforms. When these entities fail, users often lose access to their funds permanently. Professional custodians arose to hold bitcoin on behalf of customers, but have also experienced losses and typically don’t serve retail customers regardless. 
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3. Personal Error: A study by Chainalysis estimates that about 20% of all Bitcoin is lost or stranded in inaccessible wallets, often due to forgotten passwords or lost private keys. Self-custody removes counterparty risk but introduces significant risks of loss. 

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What to Look for in a Bitcoin Insurance Policy

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When considering any insurance policy, read it closely to understand exactly what it covers, doesn’t cover and explicitly excludes. Price is not the only factor to consider, especially if a low price comes with numerous exclusions that doesn’t cover the risks you fear.

A policy might primarily be a crime policy, a specie policy, or a business interruption policy. Policies can also include multiple lines. Some policies can only be purchased by commercial entities, others can cover individual investors. AnchorWatch’s first bitcoin insurance policy is primarily a precious articles specie policy and also covers some instances of crime, protecting the customer against many scenarios in which they would permanently lose control of their bitcoin and is available to both retail and commercial customers.

Look for information clearly explaining the following aspects of any policy.
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1. Coverage Limits: Check the coverage and customer conditions to know exactly what causes of loss are covered by the policy and the requirements to ensure custody (for example, a signing device or hardware wallet must be stored in a safe or vault). 
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2. Exclusions: Certain events are specifically excluded. Most policies won't cover losses due to market volatility or personal trading decisions, as that would be a financial hedge vs insurance against loss. Common exclusions include war, nuclear events and government seizure. Bitcoin insurance policies might also include broad risk events like bitcoin’s cryptography breaking. Understand any additional exclusions.
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3. Limits: Ensure the policy covers the full value of your holdings. If using a custodian, understand their policy’s limit in comparison to the amount of bitcoin in custody. 
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4. Loss Payee: If a custodian or exchange has an insurance policy, understand if you have any claim to benefits payments if a loss occurs. Often the policies at exchanges only cover a small fraction of assets in custody, and the end-customer has no rights to it regardless. Look for a policy where you are the named insured or specifically named as a loss payee.
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5. Claim Process: Understand the steps involved in filing a claim. Most policies require you to report a loss or suspected loss as soon as discovered.
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6. Provider Reputation: Choose insurers with a track record in the crypto space. Most insurers are rated by A.M. Best or Demotech with a letter grade. For example AnchorWatch policies are underwritten by A+rated Lloyd's of London, the world’s oldest insurer. The better the rating, the more likely the carrier is to be able to meet all its financial obligations in the case of a loss. 
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7. Premium Costs: In addition to looking at the cost of the insurance premium, be sure to understand the customer obligation in the case of a loss. Is there co-insurance or a deductible?

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Is Bitcoin Insurance Worth It?

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The value proposition of Bitcoin insurance depends on your specific circumstances:
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• Custody without insurance means that you are taking on the risks of loss yourself without recourse. For institutional investors or businesses dealing with large amounts of Bitcoin, insurance is often a necessary risk management tool. 
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• An insured custody model may simplify beneficiary support, where the insurer will recognize the rights of policy beneficiaries.
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• Individual holders with significant Bitcoin wealth might find peace of mind worth the premium costs. AnchorWatch is the first insurer to provide access to 1-to-1 insurance to individuals.

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Insurance is not a substitute for good security hygiene and in fact insurance is only available for robust custody practices. Always use strong passwords, enable two-factor authentication, and if self-custodying bitcoin without support, use multisig hardware wallets for long-term storage and be highly critical of your physical storage security. 

While Bitcoin offers unprecedented financial freedom, it also comes with unique risks. Bitcoin insurance provides a new and incremental layer of protection in this new financial frontier, allowing holders to navigate owning crypto with greater confidence. As with any financial decision, carefully weigh the costs and benefits to determine if Bitcoin insurance is right for your digital asset strategy.

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The Future of Bitcoin Insurance

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The future of bitcoin insurance looks promising as the cryptocurrency market continues to mature. As more institutional investors enter the space and regulatory frameworks evolve, we can expect to see more sophisticated and comprehensive insurance products. The industry is likely to develop more standardized policies, making it easier for both individual and institutional holders to understand and compare coverage options. We may also see the emergence of new types of coverage, such as policies that protect against specific technological risks or regulatory changes.  Additionally, we might see closer integration between insurance providers and custody solutions, offering seamless protection for bitcoin holders similar to our custody product Trident

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Use Cases for Bitcoin Insurance

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Bitcoin insurance serves various use cases across different types of holders:

1. Institutional Investors: For large-scale investors or businesses dealing with significant amounts of bitcoin, insurance is often a crucial risk management tool. It can provide the necessary assurance to stakeholders and regulators.
2. High Net Worth Individuals: Wealthy individuals with substantial bitcoin holdings can use insurance to protect their digital assets, similar to how they might insure other valuable possessions.
3. Custodial Services: Bitcoin custodians can use insurance to differentiate their services and provide additional security assurances to their clients.
4. Estate Planning: Insurance can simplify the process of passing on bitcoin assets to beneficiaries, as insurers may recognize the rights of policy beneficiaries.
5. Small-Scale Holders: Even for individual holders with smaller amounts of bitcoin, insurance can provide peace of mind against the risk of permanent loss.

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Anchorwatch Bitcoin Insurance Policies

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AnchorWatch is focused on developing solutions that make it easier and safer to own and hold bitcoin.

We bring a deep technical understanding of cryptocurrency custody to how we approach insurance. From the design of our policies to the technology that enables full insurance coverage, we are dedicated to bringing peace of mind to our customers. We provide coverage for loss of keys to violent theft, AnchorWatch policies provide high quality coverage on Bitcoin in cold storage. Learn more about them here or get in touch with our agents at agent@anchorwatch.com

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FAQs about Bitcoin Insurance

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Is Bitcoin Insurance worth it for individual holders?

For individual holders with significant Bitcoin wealth, insurance can provide peace of mind that may be worth the premium costs. It offers protection against risks like theft, hacks, and personal errors in self-custody.

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When is Bitcoin Insurance particularly valuable?

Bitcoin insurance is especially valuable for institutional investors, businesses dealing with large amounts of Bitcoin, and in estate planning scenarios. It can be a crucial risk management tool in these cases.

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Does Bitcoin Insurance replace good security practices?

No, Bitcoin insurance is not a substitute for good security hygiene. It's an additional layer of protection that should be used alongside robust security practices like strong passwords, two-factor authentication, and proper storage techniques.

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How can I find out the exact cost of Bitcoin Insurance for my holdings?

To get an accurate quote,  reach out to AnchorWatch agents at agent@anchorwatch.com for more information about our policies and custody solutions.

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Conclusion

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Bitcoin insurance represents an important development in the cryptocurrency ecosystem, offering a layer of protection against the unique risks associated with digital asset ownership. While it's not a substitute for robust security practices, it can provide an additional safety net for both individual and institutional holders. However, potential policyholders must carefully consider their specific needs, thoroughly understand policy terms, and weigh the costs against the benefits. As the cryptocurrency landscape continues to mature, bitcoin insurance is likely to play an increasingly significant role in risk management strategies for a wide range of bitcoin holders.

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