Bitcoin Insurance: The Real Deal or a PR Ploy?

By Aug 28, 2014 10:27 AM EST

NEW YORK (InsideBitcoins) — Coinbase recently announced the fact that they’ve been insuring their customers’ bitcoins for roughly a year, and it seems that the idea of insurance has been one of the hot trends for bitcoin storage providers in 2014.

While the concept of increased consumer protection through insurance seems like a good idea at face value, users of various bitcoin wallets should be sure to read the fine print before they put all their eggs in one basket. When you take a look at which bitcoins are actually secure under an insurance agreement, you may find that your coins are not as safe as your wallet provider may want you to think.

Cold storage not included

The notorious bitcoin blogger “Two Bit Idiot” pointed out that Coinbase’s form of insurance does not cover bitcoins that are in cold storage. When you consider the fact that roughly 97% of user funds are stored offline at all times, it’s easy to see why this is such a huge problem.

Although the idea behind cold storage is that hackers aren’t able to reach those bitcoins through the Internet, mistakes can still be made when it comes to the physical security of private keys. The fact that cold storage funds are not covered in Coinbase’s insurance offering could give some customers a false sense of security when choosing the Andreessen Horowitz-backed company as their wallet provider.

Users have to protect login credentials

The real problem with Bitcoin insurance may be that the security of bitcoins in a hot wallet truly lies in the hands of the end user. Although Coinbase does offer a vault option to their users for long-term storage, the funds in the online wallet are still up for grabs.

At the end of the day, the bitcoins guarded by the user are the funds that have the greatest risk of theft. Coinbase understands how to secure bitcoins offline, but they’re also a company that is attempting to reach out to a mainstream audience.

Multi-sig addresses

When it’s all said and done, multi-sig addresses may be the best option for securing the funds of Bitcoin users who want some traditional financial security.

This option allows users to set a limit on how many of their bitcoins can be sent from their wallet without triggering extra security checks in the system. With this safety measure in place, thefts of large amounts of bitcoins may be prevented.

In addition to offering the same kind of security that protects bank customers from large, out of the ordinary transactions in the traditional banking system, multi-sig wallet providers also have the ability to give users complete control over their private keys. After all, the party who holds the private key is the one who actually owns the bitcoins.

Written by Kyle Torpey
You can follow @kyletorpey on Twitter.

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