Insurance Expectations in Self-Custody

Insurance Coverage Expectations for Self-Custody

This memo is published by CustodyStress, an independent Bitcoin custody stress test that produces reference documents for individuals, families, and professionals.

Bitcoin Held Outside Insured Institutions

A person holds bitcoin. They wonder: is my bitcoin insured? The question arises naturally. Other valuable things the person owns are insured. The house is insured. The car is insured. Bank deposits are insured up to certain limits. Insurance is a familiar concept for protecting valuable assets. The person applies this familiar concept to bitcoin.

What follows covers how questions about bitcoin insurance arise from transferring expectations from traditional finance to self-custody. In traditional finance, insurance and similar protections are common. In self-custody, these protections largely do not exist in the same form. The question reveals an expectation that may not match the reality of how bitcoin custody works.

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Bitcoin Held Outside Insured Institutions

When a person holds bitcoin in self-custody, the bitcoin is not held by any institution. The person controls the keys directly. No bank, no custodian, no company stands between the person and their bitcoin. This is often the point of self-custody: direct control without intermediaries.

Traditional insurance for financial assets typically involves institutions. Bank deposits are insured because banks are regulated institutions with insurance frameworks. Brokerage accounts have protections because brokerages participate in industry insurance schemes. The insurance attaches to the institution, not directly to the customer.

When the person removes bitcoin from an exchange and takes self-custody, they step outside these operational frameworks. The exchange may have had insurance. The person's self-custody does not automatically inherit that insurance. The bitcoin leaves the insured context when it leaves the institution.

The question "is my bitcoin insured" may reflect an assumption that insurance follows the asset. In traditional finance, this often appears true because people keep assets at insured institutions. In self-custody, no institution exists to provide the insurance framework.

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Insurance Used as Proxy for Safety

Insurance often serves as a proxy for safety in people's minds. If something is insured, it feels protected. The insurance implies that even if something goes wrong, recovery is possible. Insurance converts catastrophic risk into manageable risk.

The question about bitcoin insurance may really be a question about safety. The person wants to know if their bitcoin is protected. They use the language of insurance because that is the familiar way to talk about protection for valuable assets.

When the answer is that bitcoin in self-custody is not typically insured in the traditional sense, this can feel like learning the bitcoin is not protected. The absence of insurance is interpreted as absence of safety. The proxy has been removed, and the person must confront the underlying question directly.

The underlying question—is my bitcoin protected?—has a different answer than the insurance question. The bitcoin may be protected through the custody arrangement itself: strong keys, secure backups, good practices. But this protection looks different from insurance. It does not involve a third party promising to make the person whole if something goes wrong.

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Coverage Expectations Mismatch Custody Reality

Insurance coverage has specific characteristics. Someone else evaluates the risk. Someone else collects premiums. Someone else pays claims when covered events occur. The insured party transfers some risk to the insurer in exchange for payment.

Self-custody does not have these characteristics by default. No one evaluates the risk of the person's specific custody arrangement. No one collects premiums based on that risk. No one has agreed to pay claims if the bitcoin is lost. The risk remains entirely with the person.

The person asking about insurance may expect that somewhere in the system, protection exists. Perhaps the wallet manufacturer provides coverage. Perhaps the network itself has some protection mechanism. Perhaps there is insurance they simply have not heard about.

These expectations generally do not match reality. Wallet manufacturers typically do not insure customer funds. The bitcoin network has no built-in insurance mechanism. Self-custody means self-responsibility. The mismatch between expectation and reality can be jarring when discovered.

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Scenarios That Trigger the Question

A person acquires their first bitcoin and moves it to self-custody. As they set up their wallet, they wonder about protections. They are accustomed to financial products coming with disclosures about insurance coverage. They look for similar disclosures with bitcoin and find none. The absence prompts the question.

A person has held bitcoin for a while and reads a news story about someone losing bitcoin to theft or mistake. The story makes them think about their own situation. They wonder what would happen if they lost their bitcoin. The thought leads to wondering about insurance.

A person's bitcoin holdings grow in value. What was once a small amount is now a significant amount. The increased value triggers thinking about protection. The person would insure other assets worth this much. They wonder if their bitcoin is similarly protected.

A person compares bitcoin to their bank account. The bank account is insured by a government program. The person wonders if bitcoin has an equivalent. They search for bitcoin insurance and find the landscape confusing or sparse. The comparison highlights the difference.

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What Insurance Would Require

For insurance to exist, an insurer would need to evaluate and price the risk. This is difficult for self-custody because the insurer cannot easily assess the person's security practices. The person might have excellent security or terrible security. The insurer cannot inspect the seed phrase storage or verify the backup procedures.

Insurance requires the ability to verify claims. When someone claims their bitcoin was stolen, how does the insurer verify this? Unlike a house fire where damage is visible, bitcoin theft leaves no physical evidence. The person could have moved the bitcoin themselves and claimed theft. Verification is challenging.

Insurance requires a premium structure that reflects risk. If the insurer cannot assess individual risk, premiums would need to be high enough to cover worst-case scenarios. This could make insurance prohibitively expensive for most holders.

These challenges explain why traditional insurance for self-custody bitcoin is rare. The product is difficult to create, difficult to price, and difficult to administer. The absence of insurance is not an oversight but a reflection of fundamental challenges.

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Limits of the Insurance Analogy

The insurance analogy may not fully apply to bitcoin self-custody. Insurance works well when a third party can evaluate risk, when claims can be verified, and when the insured party has limited control over the outcome. Self-custody inverts some of these conditions.

In self-custody, the person has nearly total control over the outcome. Their practices determine security. Their decisions determine risk. The person is not a passive party whose property might be damaged by external events. They are the primary factor in whether their bitcoin is protected.

This high degree of control makes traditional insurance a poor fit. The insured party can influence the outcome too much. The moral hazard is too great. The person could be careless, lose their bitcoin, and expect the insurance to cover the loss their own actions caused.

Instead of insurance, self-custody bitcoin protection comes from the custody arrangement itself. Good practices reduce risk. Proper backups enable recovery. Careful key management prevents loss. The protection is built into how the person handles custody, not purchased from a third party.

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The Protection That Exists

While traditional insurance may not exist for self-custody, protection is still possible. The protection takes a different form. It is not a policy purchased from an insurance company. It is the quality and resilience of the custody arrangement.

A person with a proper backup is protected against device failure. A person with secure seed phrase storage is protected against certain types of loss. A person with good operational security is protected against certain types of theft. These protections are real but depend on the person's own actions.

The protection is self-generated rather than purchased. The person builds protection through their choices and practices. No one else provides it. No one else guarantees it. The protection exists because the person made it exist through their approach to custody.

Understanding this can help the person move past the insurance question. The question may have been prompted by the desire for protection. Protection exists, but not in the form the question anticipated. The person must create protection rather than purchase it.

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Assessment

Questions about bitcoin insurance arise from transferring expectations from traditional finance to self-custody. In traditional finance, insurance and similar protections are common. In self-custody, these protections largely do not exist in the same form.

Insurance is often used as a proxy for safety. The absence of insurance can feel like absence of protection. But protection in self-custody comes from the custody arrangement itself rather than from third-party insurance products.

Traditional insurance is challenging to provide for self-custody because of difficulties in assessing individual risk, verifying claims, and managing the moral hazard of the person's high degree of control over outcomes. The absence of insurance reflects these fundamental challenges rather than a gap waiting to be filled.

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System Context

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Most Secure Bitcoin Custody Without Complexity

Insurance Analogies in Self-Custody

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