Uncharted waters are what many investors call the cryptocurrencies market with its lack of safety nets, and tidings and tribulations, as witnessed by the volatility of recent months. A lack of risk management and securities has already cost serious losses worldwide. Insurance has always been an important instrument on any conventional or civilized market that allowed parties to have peace of mind, but there is no such structure on the crypto market at present that would serve as a safe haven for crypto investors.
Insurance is basically paying a premium for the probability of an undesirable event taking place that would cause losses. The premium allows the insuree to receive compensation under such conditions that are stipulated in the insurance contract. Such contracts are not only available for the commodities market and in various industries but are also available on financial markets in the form of PUT options and other forms that are extensively being used by traders.
The Crypto Situation
The crypto market is rife with blockchain-based projects, many promising thousands of percent in returns on investment in a matter of days after their ICO. Nonetheless, a frighteningly large portion of projects on the market are based on stillborn, poorly developed ideas that cannot entice the market for demand or are simply scams. The scent of quick profits has always drawn speculators and fraudsters, and the ICO market’s lucrative waters have already attracted sharks from the fiat world. However, the frightening amount of fraud on the market is detracting many serious investors from making a stake in ICOs out of fear of losing their investments.
With no solid assets or highly market-demanded concepts backing popular cryptocurrencies, such as Bitcoin and its various incarnations, prominent market players have begun turning away from the highly risky ventures of investing in crypto assets. The market determines winners and losers as the system of supply and demand has firmly stapled that blockchain technology is predominantly of greater yield potential for consumers and businesses than coins could ever offer. As such, many investors are increasingly looking at the technology itself rather than the ICO market as a viable and profitable way of developing the young industry.
The dotcom crash era is still fresh on the minds of many, when old firms reoriented to doing business on the Internet. Shares of American Internet companies soared then and were justified by many, who claimed that a “new economy” had emerged. In fact, the business model was ineffective and led to a wave of bankruptcies and a depression on the market. The same fate awaits the ICO market in the state it is now, and the recent slump in investments into new ICOs is a testimony to the dreary prognosis.
The vast majority of blockchain projects issue their own tokens and coins, but the last two months have demonstrated a catastrophic 70% drop in market capitalization. In such conditions, crypto traders are only wishing they could have at least some of the instruments available on civilized markets that would have insured or protected them from the rampant volatility the market is currently witnessing.
The Available Options
The global insurance market size is estimated at $7 trillion (with a T) in 2017. However, at the moment, the word “insurance” is of extreme risk when used in conjunction with anything even remotely connected to cryptos. One of the reasons is that the industry is highly regulated and all entrants must undergo stringent legal and financial procedures to prove the sustainability of their business models and the availability of backing reserves. On the other hand, the industry is controlled by immense corporations, meaning the entry point is unattainably high for most.
According to the forecasts of Juniper Research, by the end of 2018, the incomes of the insurance industry technologies will increase to $235 billion, which is 34% more than in 2016. Many believe that the catalyst for the development of insurance will be the growing market of cryptocurrencies, which needs to be hedged from the risks of exchange rate volatility. Taking into account the high volatility of the market, the majority of investors will be interested in securing their assets from fluctuations in rates. This is where the term “hedging” truly comes into play, the financial equivalent of insurance.
When conducting an ICO, hedging is beneficial to both parties to the transaction. The investor reduces the amount of possible losses, and the ICO project increases its investment attractiveness due to free coverage of possible losses from price drops in the value of tokens. The maximum market volume for hedging of cryptos is estimated at $20 billion for the next five years. The market is still waiting for some serious players to enter, but, sooner or later, this will inevitably happen. This is mostly due to the gradual movement towards digital money, as even the central banks of some countries are starting to talk about national cryptocurrencies. The question is the formation of a clear and secure infrastructure as the availability of reserves for covering the immense volatility of the market is the greatest issue, and few are willing to risk such amounts on the venture.
There are asset insuring projects on the market, such as BitPark, a P2P insurance platform. The project’s coins (BPC) are utilized when giving compensation during the insurance screening process, and users can pool together their money with Bitcoin or with stablecoins. The concept behind the project is simply creating a P2P platform that will allow for creating a decentralized solution for people to insure against risks, thus bypassing the larger insurance giants with their immense fees.
A quasi-hedging project is the little-known Oduwa, an open-source blockchain exchange and trading volatility insurance platform for Bitcoin and cryptocurrency investment solutions. The project claims that their ODUWACOIN is a Nextgen cryptocurrency that offers indemnity and insurance against the volatility of the cryptocurrencies listed on the platform. Aside from providing insurance solutions, Oduwa is an exchange, where one can trade and exchange ODUWACOIN on the platform with a no fees system that provides the opportunity to explore new cryptocurrencies. Still, its prospects are moot.
Such projects are quite far from the ideal that traders are looking for, as their framework does not provide for a basis that would truly insure against potential risks that the crypto market is fraught with. However, a Russian project has recently emerged with an offer that fits the criteria of being a dedicated hedging structure, rather than a merger of an exchange and trading platform.
DeHedge was originally established as a project with hedging in mind. Using its investment and hedging fund strategy, the company is aiming to become a leader in hedging on the crypto market. As a hedging instrument, the project hedges initial exchange rates of project tokens and automatically reimburses investors within the hedging period if the rate of exchange of selected project tokens falls, thus ensuring that maximum losses are equal to hedging compensation.
“The lack of decisions to manage their risk repels crypto-active people from the market, both professionals accustomed to exact mathematics, and inexperienced investors. And the development of instruments to hedge the risks of cryptocurrency investors is intended to become a new milestone in the development of the crypto market, a kind of bridge connecting the fiat and cryptocurrency worlds, providing greater comfort to new investors,” says Dmitry Anisimov, co-founder of DeHedge.
Insurance as a term does not yet exist on the crypto market and is not set to appear within any legislative framework anytime soon as regulation does not yet exist. Traders will still be losing if the instruments available on conventional financial markets are not ported to their crypto counterparts. To remain on the market, any technology, even blockchain, must first prove its value to average consumers and businesses. However, the ICO market will burst like a bubble and blockchain’s gears will grind to a halt, setting the industry adrift down recession’s tides into dire straits if the dishonest profiteering of the few continues to flourish on the deception of others, and market participants do not receive necessary safety nets for making investments.