Insurance Analogies in Self-Custody
Insurance Expectations in Self-Custody Arrangements
This memo is published by CustodyStress, an independent Bitcoin custody stress test that produces reference documents for individuals, families, and professionals.
No Institutional Custodian
A person holds bitcoin in self-custody. They have taken full responsibility for their own keys. No exchange holds the bitcoin. No custodian manages it. The person is entirely responsible. Then they search for bitcoin insurance for self-custody. They want to add a layer of protection, something that would help if things go wrong despite their best efforts.
This analysis covers how insurance searches for self-custody reflect a desire to reintroduce external backstops after assuming full custody responsibility. The person has chosen self-custody but also wants the safety net that institutional custody provides. These desires exist in tension.
No Institutional Custodian
Self-custody means no institution holds the bitcoin on the person's behalf. The person controls the keys directly. They are not a customer of a custody service. They are the custodian themselves.
When bitcoin is held on an exchange or with a custodial service, that institution often has insurance. The insurance protects the institution's holdings against certain types of loss. Customers benefit indirectly because the institution can cover losses from the insurance rather than from customer funds.
In self-custody, no such institutional insurance exists by default. The person has removed their bitcoin from institutions that have insurance. They now hold it themselves, outside any existing insurance framework.
The search for self-custody insurance is an attempt to recreate what was left behind. The person wants the independence of self-custody with the backstop of institutional protection. They are searching for a way to have both.
Insurance Sought Post-Transition
The search for insurance typically comes after the transition to self-custody, not before. The person has already moved their bitcoin. They have already taken custody. The weight of responsibility has settled on them. Now they look for ways to reduce that weight.
This timing reveals something about the experience of self-custody. The responsibility feels heavier than expected. The person thought they could handle it, or did not fully anticipate what it would feel like. Now in the reality of custody, they seek relief.
The search is backward-looking in a sense. The person made a choice that eliminated certain protections. Now they want those protections back without undoing the choice. They want to self-custody and be protected at the same time.
The tension in this desire is real. Self-custody and third-party protection work differently. Combining them is not straightforward, which is why the search often yields limited or unsatisfying results.
Coverage Expectations Unmet
People searching for self-custody insurance often expect something similar to familiar insurance products. They expect to pay a premium and receive coverage for loss. They expect claims processes and payouts if covered events occur.
The reality is that self-custody insurance products, to the extent they exist, often differ from these expectations. Coverage may be limited. Exclusions may be extensive. Premiums may be high. The products that exist may not match what the person imagined when they started searching.
The mismatch between expectation and reality reflects fundamental challenges in insuring self-custody bitcoin. The insurer cannot easily verify the person's security practices. The insurer cannot easily verify claims of loss. The moral hazard is high. These challenges result in products that are expensive, limited, or both.
The person searching for insurance may find that the coverage available is not the coverage they wanted. The external backstop they sought either does not exist or exists in a form that does not provide the comfort they hoped for.
Scenarios That Trigger the Search
A person moves bitcoin to self-custody and then experiences a moment of doubt. What if they lose the backup? What if they make a mistake? They search for insurance as a way to address the doubt. The search is prompted by the realization that they are now fully responsible.
A person's bitcoin holding grows in value while in self-custody. At lower values, the risk felt acceptable. At higher values, the person wants additional protection. They search for insurance because the stakes have changed even though the custody arrangement has not.
A person reads about self-custody failures: lost keys, forgotten passphrases, destroyed backups. The stories make them anxious about their own situation. They search for insurance as a response to this anxiety, hoping to protect against the failures they have read about.
A person considers what would happen if they died or became incapacitated. They worry about their heirs' ability to access the bitcoin. They search for insurance hoping it might provide some protection for inheritance scenarios, even though this is not what insurance typically addresses.
The Boundary Between Custody and Coverage
Custody is about who controls the bitcoin. Coverage is about who bears the loss if something goes wrong. These are different things, though they can interact.
In institutional custody, both custody and coverage can be provided by the same entity or related entities. The institution holds the bitcoin and also provides (or has access to) insurance coverage. The customer gets both from the same relationship.
In self-custody, custody is with the person but coverage must come from somewhere else. The person must find a separate entity willing to provide coverage for bitcoin they do not hold or control. This separation creates complications.
The insurer in this arrangement cannot monitor what happens with the bitcoin. They cannot audit the security practices. They must trust the person's representations while knowing the person has every incentive to misrepresent after a loss. This dynamic makes insurance expensive and limited in scope.
The boundary between custody and coverage explains why self-custody insurance is different from other insurance. The separation of these functions creates challenges that are difficult to overcome.
What Insurance Would and Would Not Cover
Even if self-custody insurance exists and the person obtains it, coverage would have limits. Understanding these limits helps set appropriate expectations.
Insurance might cover theft in certain circumstances. If someone physically steals the hardware wallet and drains the bitcoin, coverage might apply. But proving theft versus voluntary transfer is difficult. The insurer would require evidence.
Insurance would likely not cover user error. If the person loses their backup through their own negligence, this is typically excluded. If the person forgets their passphrase, this is typically excluded. Most insurance does not cover failures that the insured party causes through their own actions.
Insurance would likely not cover market losses. If the bitcoin loses value, that is not a covered loss. Insurance covers the loss of the bitcoin itself, not changes in its value.
The limits of coverage mean that many of the scenarios people worry about in self-custody would not be covered by insurance even if they had it. The protection is narrower than hoped.
The Desire for External Backstops
The search for self-custody insurance reflects a deeper desire: the desire to not be entirely alone with the responsibility. The person has taken full custody. They feel the weight. They want someone or something to share that weight.
This desire is understandable. Full responsibility is heavy. Other areas of life typically involve shared responsibility, safety nets, and backstops. Self-custody bitcoin is unusual in placing everything on the individual.
Insurance is a familiar form of backstop. The person reaches for what is familiar. They want the insurance model to apply to their new situation. The fact that it does not apply cleanly does not eliminate the desire for it to exist.
The search for insurance is partly a search for psychological comfort. Even imperfect coverage might provide some relief from the weight of responsibility. The person wants something external to point to, something that says "if the worst happens, there is help."
Assessment
Insurance searches for self-custody reflect a desire to reintroduce external backstops after assuming full custody responsibility. The person has chosen self-custody but also wants the safety net that institutional custody provides. These desires exist in tension.
Self-custody insurance products, to the extent they exist, often do not meet expectations. Coverage is limited, exclusions are extensive, and many scenarios people worry about would not be covered. The challenges of insuring assets the insurer cannot monitor or control result in products that are expensive and narrow.
The search for insurance reflects a desire not to be entirely alone with custody responsibility. This desire is understandable but may not be fully satisfiable within the self-custody model, which by its nature places responsibility with the individual rather than sharing it with external parties.
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