Beth Pinsker: Crypto insurance is nearly nonexistent, so you’ll have to rely on some common sense to protect you

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If only your bitcoin could catch on fire — literally — then it might have a chance of being covered by insurance.

For property, fire is a straightforward hazard. But it’s probably the one big thing that can’t befall a digital currency among a host of inflictions — see FTX, BlockFi and other failures. 

As it stands, there’s not much protection for cryptocurrency — no FDIC or SIPC insurance from the U.S. government to protect against institutional failures, no broad coverage under homeowners insurance as property and very little by way of individual cyber theft coverage. Some exchanges have large policies for themselves. 

With established brokerages including Fidelity Investments entering the crypto-selling arena, and discussions about potential regulation by the Securities and Exchange Commission, this situation could change. But for now, you’re the guardian of your crypto, and your best defense is being aware of the potential harms and how you can best protect yourself. 

“You’re never going to be able to eliminate all the risks. But you can see if there’s some low-hanging fruit to make it a little bit more safe,” says Michael Menapace, a non-resident scholar at the Insurance Information Institute, and also an attorney and law professor. 

Here’s the top things you need to think about in order to protect your crypto: 

Loss of value

Bitcoin BTCUSD, +0.02% and ether ETHUSD, -0.42% are down more than 60% this year, and there’s nothing any insurance can do about that. “Cryptocurrencies are extremely volatile, and investors should only allocate money they are willing to lose,” Fidelity says in a statement to its potential crypto investors. 

But you can be strategic about other kinds of crypto-related investments you pick to avoid a complete loss, like sticking to established coins, investing in ETF products related to crypto or employing hedging strategies. 

Institutional failure

FDIC insurance protects individuals from the failure of banks. SIPC insurance, in turn, protects against the failure of securities companies regulated by the SEC.

The way it works at companies such as Robinhood HOOD, +1.12%, Coinbase COIN, +1.75%, Gemini, Fidelity and others is that they partner with regulated financial institutions to provide sweep accounts for cash on hand, which get pass-through FDIC or SIPC coverage, depending on which applies.

But that’s only while it’s in cash. Once your assets are in crypto form, they’re not covered for institutional failure. As Fidelity specifies: “FDIC insurance protects against loss in the event of a failure of the cash depository; it does not protect you against loss in the event of a failure of Fidelity Digital Assets.”

Still, Menapace sees the coming of major players into the space as a way for individuals to potentially protect themselves. These companies are, regardless of their crypto divisions, “highly regulated, generally liquid companies, that would have assets to pay if something terrible happened,” he says. 

Institutional theft

If your crypto is in the custody of a major financial company and it gets robbed, you may have some relief. Most of the bigger players have cyber theft policies, many underwritten by Lloyd’s of London.

Robinhood, for example, says: “We carry crime insurance that covers a portion of the cryptocurrency held across our storage systems against losses from theft, including cybersecurity breaches.” 

But if it’s just you who gets robbed, you’re pretty much on your own.

Coinbase says it “carries crime insurance that protects a portion of digital currencies held across our storage systems against losses from theft, including cybersecurity breaches. However, our policy does not cover any losses resulting from unauthorized access to your personal Coinbase or Coinbase Pro account(s) due to a breach or loss of your credentials.”

Direct theft

The IRS defines cryptocurrency as property for the purposes of taxation, but that does not extend to homeowner’s insurance, which would cover a stolen television. It also likely wouldn’t extend to the way a homeowner’s policy deals with stolen cash, but it depends on the policy. In any case, stolen cash claims are typically limited to no more than several hundred dollars, which would be a mere fraction of a bitcoin. 

Menapace sees the most likely resolution of this situation coming from the SEC, which could eventually designate cryptocurrency to be a security and regulate it the same way as stocks.

“That’s not a panacea either,” Menapace says. “The next question is if the SEC regulates cryptocurrency as a security, does that mean they’ll be insurable or not insurable as securities?” 

There are some specialty policies for cyber theft, with many caveats. Breach, for one, started offering a Crypto Shield product in February that covers assets held in a qualified exchange if they are stolen outright or subject to a data breach at the custodian. The cost to insure is roughly 1.5% to 2% of holdings, says Eyhab Aejaz, CEO of Breach. A quote on the site for New York coverage of 1 bitcoin is $27 a month for 100% coverage at the day’s value, with a 15% deductible.

If you hold crypto in cold storage — which means it’s in your own custody on a hard drive or similar device, though — you’re on your own. This is where you need common sense the most. Use digital-safety best practices such as enabling two-factor authentication wherever possible. Coinbase recommends a code generator or two-factor key, a strong password, not sharing passwords, making sure you have a legacy plan for your digital wallet information and, maybe most importantly, physically locking your doors.

Got a question for “Fix My Portfolio” about the mechanics of investing, how it fits into your overall financial plan and what strategies can help you make the most out of your money? You can write to me at beth.pinsker@marketwatch.com.  

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