Insuring Bitcoin

The insurance market will not insure the value of bitcoins. But insurance can play a vital role in helping make the virtual currency a safer investment overall.

Let’s be clear. Insurers generally don’t insure the value of a financial asset like the U.S. dollar or Greek debt for that matter. Because Bitcoin is new, the companies involved in the market have little financial history. Any portion of the risk that can be secured by firms with a strong balance sheet and a long stable record will make the Bitcoin market more appealing to more investors.

Many investors are not frightened by the notion of fluctuating value; after all, many investments are volatile. One of the many issues that concern potential investors in Bitcoins is whether the technology behind the currency is sound. If Bitcoin can be hacked, are bitcoins worth the risk? For those familiar with Bitcoin, the fundamental question is: Can the blockchain be trusted? If it can be trusted, can it be insured, thereby addressing one of the biggest hurdles to investor confidence?

Understanding the Heart of Virtual Currencies

As a virtual currency, the only evidence of ownership of a bitcoin resides with the electronic ledger that records every sale and purchase of a bitcoin (or fraction of a bitcoin). It is called the blockchain. It is, in fact, what makes Bitcoin viable. It is also what makes the idea of virtual currencies so appealing. Who owns the blockchain, the record of every Bitcoin transaction ever made? No one. And everyone. That’s why it works.

Bitcoin uses an algorithm that reduces the digital data associated with every transaction to a standardized size. Once a coin is bought or sold, the data is entered into the algorithm. The resulting details or “hash” are added to the existing ledger and become part of the block.

However, before becoming a verified trade, the hash will be confirmed by members of the bitcoin community called miners. These miners are incented (with newly created bitcoins) to verify the new transaction, and a consensus must be reached or the update will be rejected. Once verified, the transaction becomes part of the latest block in the chain. Simply put, the beauty of blockchain technology is that, by making the ledger available to everyone at once, no one individual can meddle with the accounts.

The Role of Insurers

The role that insurers can play in the virtual currency market is yet unclear. But the need for some sort of surety bond, crime policy or perhaps even limited cyber protection is evident. The 2014 failure and bankruptcy of Mt. Gox nearly destroyed the incipient Bitcoin market and the theft of more than $400 million in bitcoins rattled investors. (Mt. Gox’s short fallings, and they were many, would have been readily apparent to any insurance underwriter.) Insurance may not have prevented the loss, but a vetted exchange with at least some insurance protection and a thorough review by an underwriter would go a long way toward instilling confidence and helping to prevent a repeat of the disaster that nearly destroyed the market.

About Richard Magrann-Wells

Richard is a Executive Vice President with Willis Towers Watson’s Financial Institutions Group based in Los Angel…
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