This article was previously published in Insurance Advocate. Credit: MSO and Sue C.

Quimby, CPCU, AU, CIC, CP/W, DAE

It may be hard to believe, but Bitcoin has been around for over 10 years!

Registered in 2008 and introduced in 2009, Bitcoin is a digital cryptocurrency that is shared on a peer-to-peer network without the use of a central intermediary, such as a bank or government. People can send money in the form of Bitcoin to anyone over the Internet, even someone they don’t know or trust. Bitcoin can be used to purchase anything, anywhere.

One concern with anything digital is that it can be copied. Security is required to ensure the same Bitcoin is not spent more than once. Cryptography is the mathematical process that provides security for Bitcoin. It involves complex mathematical equations or algorithms that encrypt and decrypt data. The data is encrypted so it is unreadable by anyone who does not have the key.

Even though Bitcoin is virtual, it is reported that the supply of Bitcoin is finite — there are 21 million in total. Once these are mined, the world’s supply will be exhausted, barring any change in how Bitcoin’s protocol operates. Since there will no longer be the lure of Bitcoins as a reward, the number of miners will most likely decrease, increasing the amount of time it takes to verify transactions.

Bitcoin’s value comes from the fact that people are willing to accept Bitcoin as payment. It has been widely reported that the exchange rate has fluctuated wildly overtime. In 2017, Bitcoin reached a peak exchange rate of nearly $20,000. Since then, the value has plummeted. In mid-2019 the exchange rate was about $8,000.

There are a number of reasons for Bitcoin’s increasing popularity. Transactions are electronic, so they are very fast. Bitcoin is owned by the individual or business, and not subject to seizure by a government or loss from a bank failure. It is extremely secure, and theoretically may be used to purchase anything in the world.

On the downside, Bitcoin can easily be used to launder money or finance terrorism. According to David Canellis’ thenextweb.com blog, in its first 10 years of existence, over $2.5 billion in dirty bitcoin was laundered over the dark web. Bitcoin transactions are similar to cash transactions, in that they cannot be reversed. This eliminates the risk of chargeback fraud.

Chargeback fraud is common in traditional credit card transactions. The customer may attempt to defraud the merchant in a number of ways, such as disputing a transaction, claim they never received the items or that they returned them. Dealing with chargebacks and chargeback fraud is expensive for the merchant.

Still, there are many advantages and disadvantages of Bitcoin. Low transaction fees are one attractive feature of Bitcoin, because there is no set fee to accept or sell bitcoin. They are traded on exchanges, which convert bitcoins to fiat money, or government-issued currency. Fees charged by exchanges are often lower than those to use credit cards or services such as PayPal.

There are a number of disadvantages to Bitcoin, including limited acceptance, volatile pricing, potential obsolescence, scams, potential loss of access, and a finite number of bitcoins in existence to mine. Bitcoin can only be used at businesses that agree to accept them.

Despite all the attention Bitcoin has received, it is still only accepted by a small number of businesses. As with any financial risk, insurance coverage is key. According to CoinDesk it is estimated that the total amount insurers are willing to provide is approximately $6 billion, woefully short of the actual exposure.

There are two types of insurance coverage that could apply, crime and specie. Crime coverage is needed for assets that are held online in “hot walletsâ€, which are online repositories that are ripe targets for hackers.

Ideally, crime coverage would extend to cover losses due to hacking as well as a blockchain failure. Specie coverage applies to assets “at rest†and would apply to assets held in cold storage, such as passkeys kept in a vault.

It should be apparent that entering the cryptocurrency world, both as an investor and an insurer, is not for the faint of heart. The technology is confusing, and the risks are real. Only time will tell if Bitcoin and cryptocurrencies are the next big thing, or the Edsel of finance.

Glenn Insurance encourages you to practice safe spending to keep your finances secure.