Bitcoin adoption is growing across the globe and has the potential to create new opportunities for the insurance industry. In order to take advantage of those opportunities, we must understand the technology, risks as well as the myths surrounding Bitcoin. The technology is not well understood by the public creating many misconceptions. With a deeper understanding of Bitcoin, such technology could play a crucial role in facilitating the future of the insurance industry.
However, many in the insurance industry continue to doubt the relevancy of cryptocurrency. But we cannot look past the potential of the technology especially when the U.S. Federal Reserve has acknowledged the need for an evolution of currency.
On June 17, the Fed Chairman Jerome Powell gave opening remarks to a research conference in which he said, “Looking forward, rapid changes are taking place in the global monetary system that may affect the international role of the dollar in the future.” Powell went on to add that the Fed and most major economies are in the process of developing their own 24/7 payment platforms and that the FedNow service from the U.S. Federal Reserve will be available in 2023.
The Fed’s announcement shows the potential that digital currencies like cryptocurrencies have to revolutionize business in the same way that the Internet changed commerce and even society over the last 25 years. For example, the digitization of the telephone system occurred seamlessly behind the scenes. When customers picked up a phone, they still heard that familiar ringtone and still dialed the same 10 digits. And while consumers initially didn’t notice the changes, the digitization allowed for a faster Internet that gave rise to the Web and whole new industries like digital media and e-commerce.
Similarly, the evolution of our monetary system will likely first happen behind the scenes, utilizing cutting edge technology found in cryptocurrencies to conduct business faster and more efficiently. Eventually the digitization of currencies like the revolution in communications will similarly give rise to new opportunities for businesses.
For the insurance industry, our interaction with money will change before our customers interaction with money does. For that reason, it is imperative to gain knowledge and understanding of cryptocurrencies and know what differentiates them from one another. The gold standard of cryptocurrencies is widely accepted to be Bitcoin, and this article will provide a foundation to which emerging assets and policies can be measured up against.
Bitcoin is the amalgamation of years of development within cryptography, computer science, and economics. While the technology is relatively new to many, Bitcoin was created in 2009 with the underlying principles of slow, steady, and stable evolution.
Prior to discussing the potential insurance uses of Bitcoin, lets address a few important terms associated with cryptocurrency and what makes Bitcoin different than other cryptocurrencies:
In economics, there is a core list of desirable traits for a currency to have. By design, Bitcoin possesses these traits.
While Bitcoin possesses these positive traits of a solid currency, a common critique is its volatility, and rightly so. The lack of common knowledge about Bitcoin and relatively high barrier to entry due to that lack of knowledge has created a speculative component to buying and holding Bitcoin and other cryptocurrencies. The speculation hinges on the widespread adoption of the underlying asset. While this creates volatility in the price of Bitcoin denominated in U.S. Dollars, it also provides a potential reward for earlier adopters.
As consumers and insurance companies grow more comfortable with their knowledge of Bitcoin, it may make sense for insurers to start holding Bitcoin to further diversify their asset allocation and potentially indemnify losses that are already paid in cryptocurrency, like cyber insurance ransomware losses.
The fact that Bitcoin’s market capitalization has exceeded $300 billion since late 2020 and has broken $1 trillion on multiple occasions provides a strong case for insurers and others to take this asset seriously. For comparison, gold has an estimated market capitalization between $12 trillion and $13 trillion, Apple between $2 trillion and $3 trillion, and silver between $1 trillion and $2 trillion as of June 2022.
While there are several technical aspects of Bitcoin to be discussed, the practical application as a solution to many existing problems explains the increasing adoption rate. The expanse of opinions and headlines surrounding Bitcoin is too great to cover in one article. With the knowledge and definitions established in this article, critical thought based on a fundamental understanding of the properties of Bitcoin will allow for the separation of hyperbole from fact. As this field emerges, it will become increasingly important for us in the insurance industry to possess this fundamental knowledge so that we can make wise business decisions, avoiding the expense of precious resources on solutions looking for a problem.
In the next article in the series, I will address the growing adoption of Bitcoin and practical applications for the insurance industry.