The next time you create a free account to purchase digital currency on an exchange platform, consider that you are providing your name, email address, physical address, and social security number that will be tied to your account or sub-account ledger used by the exchange platform. When the exchange platforms are hacked, so is your personal information, and your digital currency is potentially lost.
Protective Regulations
Investors who own conventional securities like stocks, bonds, and mutual funds can rely on protective regulations and insurance backing from the U.S. government or private policies. However, digital currency investors do not have the same level of protection.
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. Due to the digital currency industry's lack of rules and regulations, major insurance companies struggle to assess risk factors accurately.
Is Your Digital Currency Safe?
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” in the tiny 6-point font). So now, let’s do the math. If they have 100,000 users (remember they had a plus sign after the 100,000 users), each user had one bitcoin at $40,000 in value, equating to $4,000,000,000 in insurance coverage needed. $4 trillion, and they have $700 million in insurance coverage. In most instances, a security breach affects the majority, not the minority. That would be like having complete auto insurance coverage on your Tesla valued at $90,000, and you receive $15,750 from the insurance company in replacement value.
Can I Insure my Digital Currency?
Yes, private insurance exists for digital currency, but it is constrained. Exchange platforms purchase policies with coverages that include 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 pay on a claim filed, given the probability factor. Then, there is the factor that only certain coins in certain states qualify for these coverages. Let’s say there are a lot of exceptions associated with these insurance policies.
That said, some exchange platforms are now offering the purchase of an insurance-backed digital currency protection plan for lost or stolen funds, but the cost to the consumer is steep. Again, read the fine print as the coverage may vary by coin, state you reside in, and limitations of payout. 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.
Want to dive deeper into the intricacies of digital currency investing? Click here to download our Whitepaper.
If you're considering investing in digital currency with Preferred Trust, take advantage of our offer: we're waiving the $500 digital currency account setup fee when you mention this promo between April 1st and June 30th, 2024!
