New to Cryptocurrency? Be Sure to Read the Insurance Fine Print

View the original article here (Written 12/01/17)

In the last week popular American based cryptocurrency exchange Coinbase added an estimated 300,000 new users. Driven by increasing media attention and rising Bitcoin prices which topped out at over $11,000 on Wednesday, Coinbase now has more registered users than Charles Schwab (13.3 million and 11.7 million users respectively).

For newcomers to cryptocurrency it is important to do your research and read through the fine print in the user agreement before signing up with any one exchange. Understand that your exchange will store both the fiat currency (your U.S. dollar) and the cryptocurrency during the purchasing process in two separate accounts. Some exchanges will offer private insurance on your cryptocurrency and/or FDIC insurance on your fiat currency account. There is a major difference between the two.

Exchanges that offer private insurance on your cryptocurrency are usually only protecting the value of your digital coins against a physical or cyber-attack on the exchange itself. If a hacker breaches your exchange’s security and steals your Bitcoin, you should be covered. This type of insurance does not usually cover physical or cyber-attacks on your personal account. If a hacker gains access to your account by stealing your password, you may not be able to recover your losses.

Exchanges that offer FDIC insurance on your fiat currency account are covering your U.S. dollars only (USD). The U.S. government does not currently provide federal insurance for cryptocurrency. In these circumstances the exchange is usually acting as a fiduciary and holding your USD in a segregated FDIC insured account. If you are a United States resident, any USD held by such an exchange would be protected, subject to the FDIC regulations. This FDIC insurance does not in any way apply to your cryptocurrency.

Before signing up with an exchange it is important to read the user agreement and their insurance policies carefully. Not every policy is the same. Understand how the exchange stores your fiat and cryptocurrency (whether they utilize physical or cyber storage), how they protect your account, and how they insure your investment from security breaches.

This article is not intended to be legal or trading advice and is for informational purposes only. If you would like to discuss this or any other topic further feel free to comment or message me.