bitcoin-logo-3dOne of the world’s Bitcoin exchanges, Mt. Gox recently lost $400 million worth of digital currency and cash. This left many of the customers without any way to get back their money. While removing such an incompetent company is likely good for the ecosystem in the long run (indeed Bitcoin prices have rallied since), this event was devastating for many who  had accounts with Mt. Gox, and highlights the need for insurance for Bitcoin and other cryptocurrency held with third parties.

MtGox has filed for bankruptcy after losing almost all of its customers’ deposits. In addition to the financial risk of price fluctuation, Bitcoin held in third party accounts is more susceptible to theft and loss than other assets because it handles like digital cash, without protections like those in place for bank accounts (FDIC insurance) or credit cards (extensive CCPA protection). 

One solution many are now proposing is for increased government regulation of Bitcoin. This may be inevitable at this point, but it reduces many of the decentralization benefits for which Bitcoin was originally created. Two of the best arguments against knee-jerk government regulation are in letters written by Brad Burnham and Fred Wilson.

An alternative that is closer to the tradition of Bitcoin is for the community to introduce its own, free-market improvements such as private insurance. One company  trying this is a London startup called Elliptic. It has offline servers to prevent hackers and has negotiated a deal with a large international insurance company. Elliptic charges steep rates to keep your cybercurrency safe. They keep 2 percent of its value per year, but will take less if you hold a larger amount. The bottom line is that insurance for cybercurrency is expensive, but may be worth the risk.

Another company is Inscrypto, founded by Ryan Selkis, who was instrumental in breaking news of Mt. Gox’s insolvency. The company’s website describes Inscrypto as “Bitcoin’s privately funded, decentralized version of the FDIC. We help you reduce or completely eliminate the risks of owning Bitcoin.” Selkis’ company is still in a private testing period, but it could have big implications for the future of Bitcoin. There are many advantages to using cryptocurrency, but also many risks. If there was a means to insure holdings and mitigate risk, many more players may join the Bitcoin market, which is good for the currency in the long run.