Cryptocurrency insurance is redefining how digital assets are protected, covering exposures such as hacks, theft, fraud, and regulatory investigations that traditional policies can’t reach.
This guide breaks down the fundamentals of crypto insurance, types of coverage available, how insurers assess crypto risks, and tips for implementing effective insurance for cryptocurrency holdings and operations.
Understanding Cryptocurrency Insurance Fundamentals
The Changing Landscape of Crypto Insurance
Just last decade, crypto firms operated without meaningful insurance protection. Today, that landscape has changed, and Relm has helped drive that evolution. After high-value hacks proliferated — with billions of dollars stolen in recent years — the need for dedicated insurance became impossible to ignore.
Legacy insurers have been hesitant to insure crypto due to the limited claims history and actuarial data that defines the sector. The earliest policies began to emerge in 2014 and the industry grew into a multi-billion-dollar market, and expanded at an increasing rate.
Coinlaw reports that the crypto insurance market was worth USD $2.1 billion in 2024. Forecasts state that it will reach USD $9.4 billion in 2033.
Key Stakeholders
The crypto insurance market now includes several types of players. Established insurance companies have entered the space, often via specialty lines or surplus lines. Policies may have strict terms or low coverage limits due to the perceived risk. Reinsurers can provide extra capacity.
A new type of specialized provider has also emerged to fill the gaps left by cautious legacy policies. These insurers have deep sector expertise and have pioneered solutions tailored to the sector and its unique risks.
Types of Cryptocurrency Insurance Coverage
Comprehensive cryptocurrency insurance spans risks faced by asset holders, exchanges, custodians, and the broader blockchain ecosystem, each demanding specialized protection. Here are the key coverage types.
Hot Wallet Coverage
Insurance for hot wallets protects digital assets that are actively transacting or stored online. Policies typically cover theft of crypto due to hacks and breaches targeting private keys or credentials.
Cold Storage Insurance
Cold storage insurance means protecting crypto assets that are stored offline in devices like hardware wallets. The scenarios covered include physical theft, destruction or loss of the storage media due to natural disasters, and insider collusion.
Exchange Platform Insurance
Cryptocurrency exchanges often seek insurance against hacks, security breaches, and related crimes that could drain their reserves or their customers’ accounts. Policies can reimburse losses from external cyberattacks, fraudulent transfers, or employee theft. Individual insurer wording can differ.
Smart Contract Failure Insurance
Smart contract failure insurance protects against losses resulting from code errors and logic flaws, oracle failure, protocol hacks, and other exploits.
Private Key Loss or Theft Protection
A unique risk to cryptocurrency is the loss of the private keys that control access to funds. If keys are stolen or irretrievably lost, the assets are effectively gone. Some policies cover these losses, whether due to theft or insider misappropriation.
Custodian Liability Coverage
Crypto custodian insurance is a specialized product that protects digital assets held by third-party custodians against risks including theft, loss, or damage. It covers threats like external hacking, insider collusion, and physical damage or loss of private keys controlled by the custodian.
Business Interruption Insurance for Crypto Operations
Crypto businesses can be crippled by outages, hacks or other incidents that halt their operations. Business interruption insurance compensates the insured for lost income and extra expenses incurred during downtime caused by a covered incident.
Risk Assessment in Cryptocurrency Insurance
Unlike traditional assets, digital assets introduce blockchain-specific risk factors like irreversible transfers, key compromises, code exploits, and oracle manipulation. As a result, insurers have to carry out thorough security evaluations.
With limited historical loss data, insurers use advanced scenario modelling and blockchain analytics to quantify exposure and inform precise underwriting. Large-scale hacks continue to inform assumptions about potential loss severity.
Technical Security Considerations
Certain security measures can affect a crypto venture’s insurability and premiums:
- Multi-signature wallets: These are encouraged as they reduce single-point-of-failure risk.
- Hot versus cold storage: Underwriters will inquire about the percentage of assets kept online versus offline and policies may have different sub-limits for hot versus cold wallets.
- Pen testing and security audits: Crypto firms are expected to proactively conduct penetration testing and remediate critical issues promptly. Security audits and certifications like SOC 2 are a big advantage.
- Hardware Security Modules: Using HSMs (tamper-resistant devices designed to securely generate and store cryptographic keys) is another practice to consider. HSMs add a layer of physical and logical protection (keys can’t be extracted and operations require strict authorization).
- Disaster recovery: Insurers like to see that redundancy and disaster recovery measures in place for critical infrastructure. This includes multiple data centers, redundant key backups (securely stored), and robust disaster recovery plans in case systems fail.
Applicant Considerations
Applicants for crypto coverage need to undergo thorough due diligence, which requires them to present KYC/AML controls, asset provenance (the documentation of an asset over its lifetime), results of penetration tests and audits, incident history logs, and custodian contract documents.
Implementing Cryptocurrency Insurance Strategies
Selecting Appropriate Insurance Providers
Traditional providers offer long-standing claims experience, while specialists focus exclusively on the unique risks associated with blockchain and digital assets to create bespoke policy design. In either case, prioritize providers with financial strength, crypto and security expertise, wording clarity, and territorial scope.
Policy Limits and Exclusions
Most cryptocurrency insurance policies specify limits in fiat currency, with clear rules about how assets are valued — often pegged to the market spot price at loss discovery or settlement. It’s important to be aware of sub-limits within the policy, which place further caps on coverage for specific exposures such as hot wallets or social engineering losses.
Typical exclusions found in crypto policies include losses caused by price fluctuations, regulatory seizures or acts rendering cryptocurrency illegal, damage caused by war or terrorist state actors, and losses from undisclosed wallets.
Initiating a Claim
If theft or loss occurs, the insured must notify their provider as quickly as possible. The provider will request documentation which may include blockchain forensic analysis to trace the stolen or lost assets, incident reports describing the circumstances, any relevant security audit results, and proof of the insured’s control and compliance with security protocols over the digital assets.
Regulatory Compliance Factors
Here are some factors to consider that affect how crypto businesses secure digital asset coverage and maintain ongoing compliance:
- Jurisdictional variation: Regulation continues to evolve across jurisdictions, and insurers operating globally navigate this complexity to provide clarity and confidence for clients. For example, in the US, there’s no comprehensive federal crypto regulatory framework and agencies such as FinCEN, the SEC and OFAC oversee different aspects of digital assets. Regulatory requirements also differ from state to state. On the other hand, the EU’s Markets in Crypto Assets Regulation (MiCA) provides a harmonized framework.
- KYC/AML: Strong customer due diligence and transaction monitoring are baseline expectations globally.
- Licensing: Operating under appropriate licensure like New York’s BitLicense or the EU CASP authorization reduces legal and coverage uncertainty.
Cost Management and Premium Determinants
What Factors Affect Crypto Insurance Premiums?
Insured value, hot versus cold storage, security maturity, claims history, scope of protection, regulatory profile, and broader insurance market capacity are but a few factors impacting crypto premiums.
Possible Ways to Lower Premiums
Options include:
- Raising cold storage ratios.
- Implementing robust physical security measures, where relevant.
- Documenting internal risk management structures.
- Enforcing MFA, least privilege, and zero-trust models.
- Using multi-sig / MPC and FIPS-validated HSMs.
- Performing regular pen-tests and independent audits.
- Documenting incident response and disaster recovery.
- Demonstrating compliance with regulatory requirements.
In the future, using technologies like AI to implement advanced security measures for threat detection may also influence underwriting terms.
Scaling and Risk Sharing
To handle large-scale exposures, risk can be transferred beyond the initial pool via reinsurance. Large institutional crypto companies may also use insurance towers or consortia, a layered approach where multiple insurers share risk to provide higher aggregate limits. Other approaches include DeFi insurance protocols which help spread the risk (more about that later).
Emerging Insurance Solutions
New solutions are emerging that transcend the limits of traditional insurance models. Here are some examples.
DeFi Insurance Protocols
Decentralized insurance protocols pay out from collective funding pools, and claims assessments are decentralized. There are different models of assessment. In some cases, it involves community voting and in others, oracles are used to automate the process.
Payouts can occur automatically based on predefined events or triggers like a smart contract breach or an exchange outage. When looking for DeFi protocols, consider pool solvency, thorough audits of smart contracts, and claims governance.
Peer-to-Peer Risk Sharing Models
Related to DeFi but slightly different are broader peer-to-peer insurance models. Risk pools can be formed by a number of entities. For example, a group of crypto miners might collectively contribute to a fund that compensates any member who has equipment damage or downtime beyond a certain point.
Captive Insurance for Crypto Firms
Captive insurance is where a company sets up its own insurance subsidiary to insure its risks. Premiums are paid to the captive and the captive pays if losses occur.
Tokenized Insurance Products
Another emerging concept is the tokenization of insurance. Here, investors can buy tokens that represent a share of an insurance risk pool which entitles them to have losses covered.
Hybrid Traditional-DeFi Insurance Approaches
Some traditional insurance companies adopt decentralized models. This brings more flexibility and can help speed up claims processes. DeFi insurance protocols also partner with larger insurers for reinsurance.
Takeaways for Brokers and Their Clients
Cryptocurrency insurance is a critical safeguard for crypto firms. Hacks and losses have surged in recent years, leading to novel policies and methods of mitigating risks. Reinsurance and consortia can support organizations with significant holdings. Innovations like DeFi protocols and tokenized insurance provide further options.
Relm delivers purpose-built coverage for digital asset businesses, combining regulatory expertise, technical insight, and an appetite for innovation to protect what’s next. Contact us today to learn more.
