Why does Bitcoin need insurance?

Since the theft of $78 million worth of bitcoin from Hong Kong-based Bitfinex, exchanges appear to have become a major weakness for bitcoin.

Or consider the 2014 Tokyo Bitcoin exchange Mt. Gox, which handled 70% of Bitcoin transactions at the time. Mt. Gox collapsed due to mismanagement, oversight, and lack of experience.

The catastrophic Mt. Gox incident resulted in a loss of $460 million.

Bitcoin’s Achilles’ Heel

The purpose of Bitcoin is to allow anyone with basic technology (such as a mobile phone) to gain full access to "banking capabilities." But it does not work the same way as traditional banks.

In the world of Bitcoin, you are responsible for your own funds. You must ensure the safety of your funds and confirm that every transaction is accurate, because there is no "regret medicine" here.

Bitcoin’s immutability can be said to be both its strength and its fatal weakness.

For example, if you make a transaction with a credit card and then find out that you were cheated, you can still apply for a refund, so that the wrong transaction will be interrupted. If the same situation happens in the Bitcoin system, it is not so simple.

Immutability is a double-edged sword

Before the Bitfinex incident, the DAO attack was often mentioned by people, and investors lost up to $50 million. In order to recover the losses, the Ethereum community executed a hard fork.

Unfortunately, the fork ultimately resulted in Ethereum splitting in two, creating another community, Ethereum Classic.

Is this bifurcation behavior equivalent to customer protection in deposit insurance?

Fran Strajnar, CEO of BraveNewCoin, said:

The DAO was the world's first "civil property confiscation" incident, and the fork was a user-centric emergency measure. This is obviously not an insurance policy, and it should not be viewed from that perspective.

Indeed, many consider immutability to be the most valuable feature of cryptocurrencies.

Aleksandar Matanovic, CEO of Bitcoin exchange EC District, said:

I would be disappointed if the same method used to save The DAO (forking) was used to save Bitcoin.

The lack of deposit insurance is a major obstacle to Bitcoin’s mainstream adoption

Currently, the fiat currency banking system has an absolute advantage in deposit guarantee insurance. For this type of insurance, the United States has the Federal Deposit Insurance Corporation (FDIC), the United Kingdom has the Financial Services Compensation Scheme (FSCS), and many other countries have similar institutions.

In the Bitcoin world, government agencies do not offer similar insurance plans. However, Coinbase does offer private insurance services to users. However, Coinbase's insurance service is only used to prevent theft and system vulnerabilities. Its official website clearly states that this insurance policy cannot be used to protect individual users from losses, such as losses caused by the theft of user login information.

So will the lack of deposit insurance affect Bitcoin's mainstream adoption? Aleksandar Matanovic thinks the answer is yes.

I think most people don’t think they are fully responsible for the safety of their own assets. Coupled with the complexity of Bitcoin and regulatory uncertainty, people will choose to wait and see rather than directly participate.

Additionally, deposit guarantee insurance will bring more investment to Bitcoin.

Fran Strajnar says:

For buyers, the lack of deposit guarantee insurance on exchanges is indeed a headache, as they believe that such insurance can bring more investment to the Bitcoin industry.

Deposit insurance is feasible in the Bitcoin industry

The attacks, thefts, and poor management that Bitcoin exchanges have experienced can be seen as lessons learned, even though the cost of learning this lesson is too high. The Bitcoin community can also solve the deposit guarantee problem. Deposit insurance is equivalent to a product that can be initiated by private companies.

Aleksandar Matanovic proposed a suitable solution:

I think it won't be long before companies start offering to guarantee deposits of Bitcoin (or altcoins). They can charge a small fee for this. Just like a safe deposit box at a bank.

The characteristics of cryptocurrencies determine the diversity of their deposit security solutions.

Fran Strajnar says:

As cryptocurrencies continue to develop, exchanges will gradually begin to provide collateral services, such as exchange-traded funds (ETFs). At the same time, we will also see a large number of decentralized tools emerge in the market, which can return the balance (private key) on the trading platform to the user.

It is common sense to ensure the safety of funds

The existence of hidden dangers in the exchange system is well known and has become a hot topic of discussion. Generally speaking, it is best not to keep funds in the exchange wallet.

Remember, until cryptocurrencies have deposit insurance, you are responsible for the safety of your own funds.