Technology is emerging fast with cryptocurrency being the most promising type of currency but the value of digital assets is quite unstable and vulnerable to hacking. With the adoption of cryptocurrencies such as Bitcoin and Ethereum on the rise, the protection of these investments for example by taking an insurance policy has become necessary. 

Crypto insurance is an upcoming market that aims at ensuring cryptos against losses that arise from various factors such as fraud and hacking. The latest hacks and losses, which have become more rampant, make insurance an essential factor in the key driver of the acceptance of digital currencies. 

Increased Call for Crypto Insurance 

Due to the increasing market of cryptocurrency, the demand for Crypto Insurance has also come up. Due to the market’s lack of regulation and the issues of hacking and theft digital assets are at risk. In one year or better still the year 2020, over $3 billion worth of cryptocurrencies were pirated through different attacks to exchanges and wallets. This increase in the frequency of attacks has in one way or the other created the need for specific insurance products for cryptocurrency assets. 

Like any common insurance, crypto insurance is arranged to protect the risks concerning cryptocurrencies. Some of these crimes may involve theft from online wallets, hacking of cryptocurrency exchanges, and fraudulent activities that may result in loss in cash. In this industry, there are firms that deal with insurance policies in that they assist in protecting the losses of the investors in bitcoins and firms that operate with Bitcoins. Some of the largest insurance companies are looking into offering crypto insurance products and this is a sign of rising confidence. 

Types of Crypto Insurance 

Based on the nature of risk inherent to cryptos, there is a range of insurance products which can be offered. 

1. Custodial Insurance 

One of the widely known categories is custodial insurance which protects crypto assets managed by custodians such as exchanges and wallet service providers. Most of these firms act as custodians and hold substantial funds of their customers’ cryptocurrencies increasing their vulnerability to cyber criminals. The majority of the custodial insurance act as shields in cases of theft, making it possible for clients to regain part or full of their lost cash. 

2. Cybercrime Insurance 

Another product that is bought in the crypto insurance market is called cybercrime insurance. It guards against hacking, phishing as well as the rest of cyber infringements that may lead to the loss of files. These policies contain elements of reimbursement for the recovery of the lost funds and also the legal and technical necessities for investigation and solution searching of the occurrence. 

3. Smart Contract Insurance 

Liabilities that exist within DeFi and smart contracts have seen insurance products being developed to mitigate risks of losses within these smart contracts. Smart contract insurance plays the role of mitigating against shots that enable code villages, bugs, and other exploits that result in loss-making. Such an insurance type will be crucial for DeFi, as billions of dollars might be trapped in smart contracts that can be hacked. 

4. Speculative Risk Insurance 

Insurance firms are also in the process of providing solutions to hedge speculative perils including severe price swings in cryptocurrencies. Such policies may serve as a cushion for companies dealing with digital assets that are usually affected by the market fluctuations. Despite the fact that this kind of insurance is still quite new, it demonstrates the efforts of the industry to cover all spheres of the cryptocurrency risk. 

Difficulties Encountered in Crypto Insurance Market 

Nevertheless, the crypto insurance market has a number of problems, which are present even despite the growth of interest in this field. 

Lack of Regulation 

The most significant problem can be regarded as the absence of legislative restrictions concerning this type of market. Due to lack of standard or regulation most of the time the insurance companies struggle in differentiating the real risk with policy underwriting of digital assets. The lack of precise rules also implies that insurance providers are not quite sure of how to approach different claims and losses associated with crypto assets. 

Valuation Issues 

Another difficulty is the question of how to assess the value of such digital assets as cryptocurrencies for insurance. The unpredictability of cryptocurrencies makes them very risky, and hence their value is not easily definable by the insurers. The case with a loss is that sometimes it is unclear how much has to be paid, since the value of the cryptocurrency in the course of the claims process might change. 

Limited Data 

The crypto insurance market is an emerging market, and, therefore, there is scarce information on the loss occurrence rates and the magnitude of the losses in the area. This is a big challenge that insurance businesses face since they do not have historical facts and figures to develop accurate policy tariffs as well as assess the risks involved. 

High Premiums 

As cryptocurrency is highly volatile and risky, insurances for cryptocurrencies cost far more than the regular insurances for the appraisal assets. This makes it difficult for individuals and business organizations seeking to purchase insurance for their cryptos because they may end up paying more than the policy is worth. 

Future of Crypto Insurance 

The prospect of crypto insurance is rather relevant since new market players appear and offer more niche solutions to the customers who are using cryptocurrencies. Thus over time as the market for cryptocurrencies becomes more established, the need for insurance solutions will increase in order to meet the emerging demand. Market factors which incorporate regulatory issues will be crucial in the determination of future evolution of crypto insurance since emerging guidelines will aid the insurers in the determination of the risks involved, and therefore design affordable and accessible products. 

Insurers are also turning their attention towards how the blockchain technology itself could also be used to enhance the insurers’ processes and decision making. Some of the possibilities are the usage of blockchain for the same, extended, safe and immutable systems of claims processing, as well as managing insurance policies.