Miraculous, unprecedented, extraordinary – these are just a few words that come to mind when considering the meteoric rise of cryptocurrency over the past several years. But, one could also describe this young market as volatile and risky, especially within the context of 2018 alone. While there’s validity in both perspectives, one thing is for sure: in the cryptocurrency space, well-educated investors fare far better as a whole than those who haven’t taken the time to do their research. Despite the tumultuous ups and downs we’ve experienced this year, both short-term and long-term investors are continuing to pour into the market, proving that cryptocurrency has more staying power than many believed possible.
That said, there are certain risks that every cryptocurrency investor should be aware of from the outset. Major price swings and get-rich-quick ICOs aside, opportunities to scam and steal have attracted hackers and online criminals. It was only a few months ago that cryptocurrency exchange Coincheck experienced a massive breach that affected the altcoin, NEM. An estimated 500 million NEM coins were lost in the hack, which caused its value to drop by more than 20 percent and sent shockwaves through the entire market. Even a rumored breach can cause a market dip. Earlier this year, the market took a dive due to buzz of an alleged attack against cryptocurrency exchange, Binance.
With so much at stake, smart investors are taking the time to truly align their investment strategy with their risk tolerance and goals, and educate themselves about the digital assets that they purchase, where they store their assets and what types of protections are available.
Unfortunately, one important form of protection that’s often available in other markets, insurance, is not as widely available within the cryptocurrency space. Here’s what you need to know about insurance and protection for cryptocurrency investments.
Your Investment Strategy Matters
If you’re a crypto day-trader – someone who needs to keep your assets on an exchange to capitalize on short-term market action – the benefits of “immediacy” and prompt liquidity often outrank the risks involved with storing your holdings on a third-party platform that may be more susceptible to cyberattacks. There’s no guarantee that trading and exchange platforms will fully reimburse their users in the event of a hack. On the other hand, if you follow a long-term investment, or “HODL” strategy, in which you don’t need to buy, sell or trade regularly, you may sleep easier at night by storing your assets with one of the safer, more secure options available.
It’s important to note that while there are a variety of secure options for long-term cryptocurrency storage, one of the most reliable methods for truly insuring digital assets lies within a self-directed, Digital Currency IRA. These accounts work similarly to conventional IRAs, but they allow investors to incorporate alternative assets, including cryptocurrencies like Bitcoin, Ethereum and Ripple, into their retirement plans. For many, this strategy combines the best of both worlds – you can capitalize on the tremendous growth potential offered by the top cryptocurrencies in a tax-deferred IRA, while enjoying the peace of mind that comes with knowing your holdings are secure and insured.
Cryptocurrency Storage Options Can Vary Greatly
“Hot” wallets are connected to the Internet, offering the convenience of fast access to your assets for sales and trading. As such, these types of active wallets are often used by short-term traders who are comfortable with the associated risks. “Cold” wallets are the more secure, offline option. If you’re shopping for a Bitcoin IRA provider, ask questions about their storage devices and practices to ensure that your assets will be held 100 percent offline, on a true cold storage hardware device. The physical security of your provider’s storage facility also matters a great deal. Ask around and work with organizations that store your digital assets in depositories with top-of-the-line vaults, with state-of-the-art security systems and even armed guards. This type of security is only offered by some Bitcoin IRAs.
Not All Digital Currency Insurance is Created Equal
If you are considering a solution that offers insurance, the type of policy(ies) offered is critical; the right insurance can be a safety net even in the event of failed security or storage processes. When considering insurance for cryptocurrencies in a Digital Currency IRA, there’s much more to consider than strictly the policy limits. Many Bitcoin IRA providers only offer insurance coverage during the process of purchasing the asset, which is just the tip of the iceberg. The reality is that cryptocurrency hacks hardly ever take place during the transactions themselves. Before selecting and moving forward with a Digital Currency IRA provider, you may want to consider one that insures both the purchase and the storage of your cryptocurrencies. Insurance for digital assets held in storage is incredibly rare today, yet it’s an important benefit as this is where they’re most vulnerable.
Explore your options and work with a provider that offers a policy that puts you at ease. For example, some companies offer “end-to-end insurance,” which protects your assets through every stage of the process, even from any cases of internal mistakes, fraud or theft. Some policies even offer protection against social engineering attacks, which are convincing criminal attempts to con unsuspecting victims into willingly handing over their private information or digital assets. Social engineering attacks are rampant in the market today as one of the main tactics cyber thieves use to steal cryptocurrencies, so insurance policies that provide coverage against them may prove to be crucial.
The Bottom Line
Insurance and true investor protection in the cryptocurrency market is somewhat of a luxury today. Generally speaking, if you choose to pursue a short-term investment strategy, you will likely need to be willing to trade immediacy for higher risk and less protection. For long-term investors, security and insurance considerations are hyper-critical to protect your digital assets over time. As the market matures, options for insurance and asset protection will evolve too; but as it stands now, one of the most secure solutions for storing cryptocurrency investments would be a Digital Currency IRA. No matter which investment strategy works best for your goals, work diligently to stay educated on all potential risks involved.