We have car insurance, life insurance, house-property insurance and now a form of cryptocurrency insurance is available.  Experts have suggested that the cryptocurrency sector needs a reliable insurance mechanism. In December 2019 the first "stability fund" was introduced.

Insurance for Cryptocurrency Exchanges

A large number of investors use centralized exchanges which are one of the largest targets for hackers and thefts by insiders (see my previous blog post here on crypto thefts). Binance, Coinbase, QuadrigaCX and Bittrex are just some of the well-known exchanges that were hacked or ripped of by insiders. If you are parking your funds in exchanges for any length of time (staking tokens or holding exchange tokens like Binance coin BNB or Kucoin shares KCS) then make sure you do due diligence regarding the exchanges security, insurance and policies for reimbursement should your tokens go missing.

As a measure of protection investors should use exchanges with the best security and insurance coverage possible. Gemini Exchange was founded by the Winklevoss twins and is available to U.S. customers. It was the first exchange to pass a Service Organization Control (SOC 2 Type 1) examination, demonstrating a high level of security compliance in protecting user data and funds. It also uses a proprietary cold storage system, and has insurance for assets in custody. Gemini may be one of the world's highest security cryptocurrency exchanges.  For insurance Gemini enlisted Nakamoto Ltd., an insurance company to insure its business for up to $200 million. This the largest amount for any crypto custody service in the world. This new insurer will help Gemini’s institutional clients to meet regulatory requirements. Yusuf Hussain at Gemini stated the insurance is consistent with their approach of being a security-first, compliance-first, and regulatory friendly exchange and custodian.

Insurance to cover the loss by thieves and hackers is included in the coverage, but other risk transfer solutions are needed to meet the unique conditions presented by cryptocurrencies.  For example, users could benefit from some type of protection against market price volatility and flash crashes through traditional insurance carriers or by other means. In addition, unforeseen catastrophic events could occur such as the US deciding it will shut down all of  the cryptocurrency exchanges at once, declaring them illegal or if a number of countries seeking to introduce centralized currencies all outlaw Bitcoin at the same time. 

A mechanism needs to be available as an option to protect and buffer investors from these “black swan-type” events. 

The First Stability Fund

One solution  which offers a form of insurance against cryptocurrency volatility is the creation of a “stability fund”.  A company called Equilibrium recently created a fund to protect users by introducing its stablecoin, EOSDT.  The stablecoin protects against black swan events with 6.5 million self-capitalized EOS tokens (estimated at ~$25 million dollars USD). The fund was initiated in December 2019 to provide investors a means of protection from cryptocurrency sector price volatility. 

Traditional Investment Vehicles with Cryptocurrency Exposure

While not true insurance it is well known that Exchange Traded Funds (ETFs) can act to buffer investors losses by holding a larger number of different company shares, so if one or two company performs poorly within the sector the overall losses are minimized.   Cryptocurrency ETFs are already trading in a number of countries but so far regulators in the U.S. have denied multiple attempts to offer such products on exchanges.  It is believed that  a cryptocurrency exchange traded fund (ETF) will be approved soon in the U.S. and like other exchange traded funds in the stock market  such a fund tracks an index or a  basket of goods.  A cryptocurrency ETF would track one or more digital tokens and likely include a larger weighting of several stable coins to buffer against cryptocurrency black swan events. Fredrick Reese a financial reporter recently identified the best performing blockchain ETFs which include: the Amplify Transformational Data Sharing ETF, First Trust Index Innovation Transaction & Process ETF, and the Innovation Shares NextGen Protocol ETF.

Currently U.S. investors looking for exposure to bitcoin through traditional stock market investment vehicles which have SEC regulatory oversight (a form of insurance and shareholder protection) can use Grayscale Bitcoin Trust.  Investors can buy shares of the trust on the over-the-counter market (OTC:GBTC). Grayscale Bitcoin Trust buys and holds bitcoin with each stock share corresponding to a small amount of bitcoin (less than one-thousandth of a bitcoin).  ETFs and stocks like Grayscale Bitcoin Trust allow those not familiar with crypto wallets and crypto exchanges the ability to invest in cryptocurrencies with the advantage of quickly exiting their positions if needed.

Conclusion

The cryptocurrency sector continues to mature with the recent introduction of the first stability fund that offers investors of EOS a measure of protection, much like insurance, against market blackswan events.  The success of Equilibrium will result in several follow on stability funds for other blockchains in the future.  Also, the approval of the first cryptocurrency ETF by the SEC in the U.S. will be a critical development allowing American investors to reap the benefits and advantages of holding a basket of cryptocurrencies through an ETF.  Overall, the appearance of stability funds is a bullish indicator.  It once again points to the ongoing maturation of the cryptocurrency space.