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Does the concept of cryptocurrency "insurance" undermine the purpose of "being your own bank"? Recently I have seen more Bitcoin related companies offer some sort of insurance for Bitcoins stored in their custody and am concerned with its unintended effects.

Nobody likes the financial losses than result from hacking, but I always thought that the decentralization of control of our own money was one of the primary benefits of Bitcoin.

Education (of best security practices) and the rise of multisignature transactions and decentralized exchanges such as Bitsquare can greatly reduce the need to entrust 3rd parties with your Bitcoin.

Insurance adds cost to the system (negating part of the financial advantage Bitcoin has over Visa and Western union) and encourages trusting 3rd parties with Bitcoin safekeeping (increasing centralization of control) over learning how to safely secure it yourself (retaining full control).

Could cryptocurrency "insurance" slow Bitcoin adoption? If so how can we encourage educational efforts as a better solution. Are regulators or the free market the primary promoters of cryptocurrency insurance?

Jestin
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Sebastian Ullrich
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  • `If so how can we encourage educational efforts as a better solution.` I think it's disingenuous to say that there's no risks involved in running an exchange. [ShapeShift was hacked *three times* from one initial breach, losing $200K in total.](http://moneyandstate.com/looting-of-the-fox/) Even technically competent people struggle to build systems that are secure against insiders. – Nick ODell Jun 21 '16 at 02:48

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If anything, I believe the ability to buy insurance on cryptocurrency investments would speed up adoption by making it less risky to traditional investors. Simply having insurance available doesn't mandate that everyone buy it; we'd all still have the choice whether we opt-in or not.

Traditional investments tend to have insurance policies on the insurance policiy of the insurance policy of the initial investment. While it's a somewhat yucky business, it's also a standard practice in today's financial ecosystem. Having these options available for bitcoin only strengthens bitcoin's value proposition and familiarity to traditional investors.

Nick ODell
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Jestin
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The key to this is that insurance is not MANDATORY. You can still be your own bank if you want, but it's perfectly reasonable for someone that isn't comfortable securing digital assets to outsource that to someone else. As far as whether this will have a significant effect on adoption is at best speculation.

There are many reasons why someone would buy bitcoin, from using it to send money abroad to buying amazon things at a discount. A lot of use cases actually don't require any holding of the money for a significant period of time, which is the use case for insurance. As far as insurance services, the option expands the use cases, so it probably expands the number of people that would adopt.

Jimmy Song
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    Regulation may require exchanges to purchase insurance in order to operate in certain jurisdictions, so it indeed may be mandatory for some. – 254123179 Jun 21 '16 at 05:41
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Insurance is one of many methods to transfer risk from one party to another. It adds cost because there is a price to pay for some third party to bear risk. If there information was perfectly symmetrical where everybody has access to same information then Insurance would be a zero-sum game.

There is always risk in everything you do. In the context of being your own bank maintaining your own private key for your Bitcoins. There are always potential accidents (e.g. your storage device containing your private key might break due to some erroneous error, the information in your USB key in some bank vault getting wiped as a consequence of an EMP). That's where Insurance comes in, it is for some person who wants to eliminate any possibility of loss to transfer this risk to some third party who is happy to carry this risk at some price.

Therefore, there's no reason to think why Insurance might slow the adoption of Bitcoin. Insurance should be available for anything where there is any risk whatsoever.

rny
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