The first Bitcoin was mined in 2009 – only 14 years ago. In these 14 years, Bitcoin has developed from a curious experiment ran by a small group of cypherpunks into a global phenomenon. Its journey from obscurity to mainstream recognition has been nothing short of remarkable, as has been reflected not only by its price, but by the growing computing power securing this global network. Bitcoin is on its way to disrupt traditional financial systems, challenging the centralized control of money and empowering individuals with financial sovereignty.
While much of the discussion in the Bitcoin community has been focusing on the impact of Bitcoin on central monetary policy and the private banking sector, there has been a surprising lack of discourse about the intersection between Bitcoin and insurance.
On the other hand, the insurance industry has kept itself busy discussing the usage of blockchain, web3 and cryptocurrencies in general. Few in the insurance industry have realized that Bitcoin – not crypto, not blockchain, not web3 – will have a disruptive impact on their business.
This article aims to shed light on why the insurance industry should care about Bitcoin and why, likewise, Bitcoiners should also consider the potential of insurance.
The Bitcoin Revolution and the Insurance Industry
The impact of Bitcoin on the traditional financial systems extends beyond just banking and monetary transactions. As the Bitcoin revolution gains momentum, it is important to explore its potential implications for all sectors, including the insurance industry.
To begin with, here are some high-level questions that leaders in the insurance sector should explore regarding the intersection of these two fields:
- How could insurance companies utilize Bitcoin as a payment vehicle?
- What investment opportunities arise from the Bitcoin ecosystem?
- Which new products could insurance carriers develop as Bitcoin grows in importance?
- How can Bitcoin help to improve outdated processes within the insurance industry?
By actively exploring and embracing Bitcoin’s potential, insurance companies can position themselves at the forefront of innovation, adapt to evolving customer needs, and drive positive transformation within the industry.
Likewise, Bitcoiners should ask themselves:
- What would small and large scale risk diversification look like under a Bitcoin standard?
- What are the potential risk implications for Bitcoin mining companies?
- How can the insurance industry help Bitcoin based companies to be successful and grow adoption?
- How could insurance products tailored to the Bitcoin market benefit both the industry and individual Bitcoin users alike?
Let’s now look more closely at the benefits that Bitcoin can bring to the insurance industry and how, vice versa, insurance can help the Bitcoin network.
Benefits of Bitcoin for Insurance Companies
Bitcoin offers several advantages that insurance companies can leverage. Among these advantages are:
- Efficient Payments: Bitcoin allows for faster and more cost-effective payments. Transactions on the main layer have an average historic cost between $0.50 – $2.50 and transactions on the second layer are virtually free of charge, with average transaction fees of 0.0029%. Insurance companies can make use of this in terms of the payment of insurance premiums, settlement of claims, but also for large volume cross-border transactions between corporate entities.
- Financial Inclusion: Around 20% of the world’s population do not have access to the global financial system and hence lack insurance coverage. These people have no way to store, invest or transfer their excess productivity, which massively hinders their personal and economic development. Bitcoin offers a game-changing solution. By allowing any person with a smartphone to store and transact value, Bitcoin has the potential to provide financial inclusion on a global scale. For insurance companies, this opens up new possibilities in thus far untapped markets, by providing risk coverage in these countries and regions.
- Innovative Products: Individuals and businesses involved in Bitcoin, including Bitcoin holders and miners, are exposed to various risks, including theft, cyberattacks, and hardware damage. These risks can lead to significant financial losses. Specialized insurance products tailored for Bitcoin can mitigate these risks, offering protection and providing reassurance to the participants of the Bitcoin network.
- Investment Opportunities: Finally, insurance companies can explore Bitcoin as an alternative investment asset, allowing them to diversify their portfolios and potentially achieving higher returns for their customers and shareholders. In the 12 years between 2011 and 2022, Bitcoin outperformed any other asset class in 9 out of 12 years. Cumulatively, the return of Bitcoin between 2011 and 2022 was around 1,500,000 %. The following table shows the annual return of the best-performing asset since 2011:
| Year | Asset Class | Return |
|---|---|---|
| 2011 | Bitcoin | 1,473 % |
| 2012 | Bitcoin | 186 % |
| 2013 | Bitcoin | 5,507 % |
| 2014 | REIT | 28 % |
| 2015 | Bitcoin | 35 % |
| 2016 | Bitcoin | 125 % |
| 2017 | Bitcoin | 1,331 % |
| 2018 | Cash | 1.8 % |
| 2019 | Bitcoin | 95 % |
| 2020 | Bitcoin | 301 % |
| 2021 | Bitcoin | 90 % |
| 2022 | Cash | 1.6 % |
Sources: Novel Investor and Good Financial Cents
With the growing importance of Bitcoin, insurance companies need to understand its implication on their core business and investment activities. By actively exploring its potential and managing its risk, insurance companies have the opportunity to benefit from this revolutionary digital, decentralized asset.
The Role of Insurance in a Bitcoin Standard
Let’s now shift our focus from the insurance industry to the Bitcoin community. Bitcoiners, who naturally feel skeptical towards traditional financial intermediaries, should recognize the role insurance companies can play in a Bitcoin standard world. Unlike banks, insurance companies provide risk mitigation and diversification that enable resilient societies and innovative economies.
Key considerations for Bitcoiners include:
- Coverage for Bitcoin custody: As the adoption of Bitcoin grows, individuals and businesses will have a need for insurance coverage to protect their asset holdings from theft, loss, or other risks. Bitcoiners should consider partnering with insurance companies to develop tailored coverage options specifically designed for Bitcoin self-custody and third-party custody.
- Bitcoin mining insurance: Bitcoin mining is the backbone of the Bitcoin blockchain and hence crucial for the security of the network. Bitcoin mining companies face risks such as the physical damage or loss of their expensive physical hardware and cybersecurity risks. Insurance companies can support Bitcoin mining operators to manage these risks through tailored insurance products.
- Business continuity and resilience: Insurance companies can support the Bitcoin community by offering coverage for businesses that rely on Bitcoin for their operations. This includes coverage for physical infrastructure, as well as coverage for business interruption or loss of funds due to unforeseen events. These insurance products can help ensure the resilience and continuity of Bitcoin-related businesses and organizations.
- Cybersecurity protection: With the increasing use of Bitcoin, the need for robust cybersecurity measures becomes vital. Insurance companies specializing in cybersecurity insurance can work closely with the Bitcoin community to develop comprehensive coverage options that protect against cyber threats, hacking incidents, and data breaches.
- Regulatory compliance and legal protection: Insurance companies possess expertise in navigating complex regulatory environments and can provide legal protection through insurance coverage for potential disputes or legal actions related to Bitcoin transactions.
- Hedging against price volatility: Bitcoin is a very young currency and naturally has experienced a lot of volatility in recent years. This can pose risks for individuals and businesses holding significant amounts of Bitcoin or using Bitcoin as a payment method in their business. Insurance companies can offer innovative products that enable Bitcoiners to hedge against price fluctuations, providing a level of stability and risk management in a Bitcoin standard world.
By embracing the benefits of insurance, Bitcoiners can strengthen the resilience and stability of the Bitcoin ecosystem. These partnerships can address the unique risks and challenges faced by the Bitcoin community, providing them with peace of mind and fostering trust in the broader adoption of Bitcoin.
Summary
As Bitcoin continues to disrupt the financial services industry, it is crucial for the insurance industry and Bitcoiners to recognize the potential synergies and opportunities that lie at the intersection of insurance and Bitcoin. By embracing this convergence, insurance companies can leverage Bitcoin’s advantages, create innovative products, and streamline processes. Simultaneously, Bitcoiners can utilize insurance as a tool for risk diversification and protection. Together, the insurance industry and the Bitcoin community can shape the future of finance and redefine the boundaries of possibility.