Crypto currency has only been around for a few years, but it’s already a $2 trillion market. In fact, over $91 billion in crypto currency is transacted every day across the globe. Perhaps this is why more than 100 million Americans now believe that crypto is a safe, sensible form of investment.
But crypto’s opportunities are offset by a number of risks, as seen in the following facts:
- $70 million in crypto is lost each week due to missing keys, market fluctuations, and corrupted files.
- More than $14 billion in crypto was stolen by online criminals in 2021 alone.
- Hackers are developing new ways to steal and corrupt crypto currency all the time.
Fortunately, the insurance industry has developed products to ensure crypto holders against many forms of loss. These policies provide a valuable safety net against the uncertainties of an ever-changing currency market. But is crypto insurance worth the cost? Let’s begin by looking at the many ways that criminals target crypto users.
How Is Crypto Currency Stolen?
The methods that cyber criminals use to target crypto owners include:
- Hacking into an exchange: for example, on December 4, 2021, BitMart announced a widespread security breach that stole $150 million worth of crypto from active, or “hot” wallets.
- Phishing attacks: often these appeals are disguised as legitimate contests or lotteries, with the proviso that the contestant must provide his or her login details to enter the competition.
- Online romance schemes: scammers target lonely individuals with promises of love and intimacy, only to ask for crypto payments to cover personal emergencies or traveling expenses.
But perhaps the most common way that fraudsters exploit crypto owners is through online Ponzi schemes. This method is so widespread (more than $2 billion in losses to date) that it deserves its own section.
How Do Scammers Use Ponzi Schemes to Steal Crypto Currency?
In 2013, the US Securities and Exchange Commission (SEC) charged a Texas man named Trendon T. Shavers with stealing 700,000 units of Bitcoin through a phony investment scheme.
Shavers claimed to have secret knowledge about the crypto market, and offered his victims 7% weekly interest on their investments if they would trust his “expertise.” In reality, he simply used the funds of new investors to pay existing ones, while converting much of his acquired Bitcoin into US currency to fund his lavish lifestyle.
Shavers was surprised when he caught the attention of SEC agents, because he believed that Bitcoin transactions were outside the domain of the federal government; but he was wrong. He eventually pled guilty to one count of securities fraud and was sentenced to 18 months in prison.
The SEC now has a team that educates crypto holders about the dangers of phony investment scams. Here are some of the warning signs the agency says to watch out for:
- Unlicensed or unregistered investing firms: every legitimate investing company in the US must be licensed and/or registered with federal or state authorities.
- Inability to review your investment details: crypto criminals try to hide the truth about their intentions for as long as possible. This includes making it difficult or impossible for investors to check the status of their account.
- Lack of qualification standards: most legitimate specialized investments require potential investors to meet salary or net worth requirements.
- Obscure or complex language in the prospectus: this is designed to confuse victims, so they part with their crypto currency on blind faith alone.
- Social marketing tactics: often, a Ponzi scheme operator claims to be a member of a particular religious, political, or cultural organization. The intent is to fly under the radar of otherwise wary investors: “you can trust me; after all, I’m one of you.”
How Can Crypto Insurance Protect You from Fraud and Theft?
Crypto insurance provides protection for the policyholder in the following environments:
- Exchanges: which, as we’ve already seen, are among the most common targets for crypto criminals.
- Gateways: where crypto holders are able to purchase goods and services from mainstream online businesses. Sometimes the gateway operator is an online fraudster.
- Mining services: which allow investors to rent mining hardware in exchange for crypto payments. In many cases, the hardware is either ineffective or nonexistent.
- Business wallets: crypto insurance offers ways for commercial clients to protect their online wallet.
- Custodial arrangements: where the currency holder allows a third party access to his or her keys, in exchange for guarantees against hacking. In some cases, the custodian is actually a criminal hacker pretending to be a legitimate service provider.
So, Is Crypto Insurance Worth It?
Ultimately, only you can answer this question. However, insuring your crypto investment is an effective way to protect yourself from the hazards associated with digital currency. Given the effort and passion you devote to your crypto accounts, purchasing coverage is probably a very good idea.
