Unexplored territory – this is what numerous investors call the cryptocurrency market, with its insecure exchanges, information wars, scam projects and high volatility. Insufficient risk management and security measures have caused serious losses to users around the world.
Insurance has always been an important component of any civilized market, providing parties with guarantees of reliability. Insurance payments reimburse damage incurred due to adverse consequences. However, the cryptocurrency market still lacks an entity that would ensure a ‘secure paradise’ to investors.
The current state of things
The crypto market is full of blockchain projects, some of which promise more than 1,000% ROI (Return on Investment) in mere days after ICO (Initial Coin Offering) closure. Unfortunately, a disconcertingly large number of these projects are based on ‘stillborn’, crude ideas incapable of meeting the market’s demands or sometimes being an outright fraud. The smell of quick profit has always lured con artists. Meanwhile, the fear of losing funds has discouraged many big investors from backing ICOs.
The market determining winners and losers in the context of demand and supply has clearly grasped that the blockchain technology bears a lot more benefits to businesses and consumers than investments in questionable projects. This has incentivized investors to focus on the technology proper – rather than the ICO market – as a viable and profitable way to push the growing industry forward.
A lot of us still remember the dot-com bubble. Back then, many existing companies repurposed their business models to align with the Internet ecosystem. In fact, though, these business models turned out inefficient, causing bankruptcies and depression on stock markets. The ICO market as we know it might go the same route – the recent decline in ICO investments confirms the pessimistic predictions.
A bevy of blockchain projects use tokens and coins of their own, but their market capitalization has dropped by 70% over the last two months. Under the circumstances, crypto traders can only dream of having at least some instruments of the traditional stock market on their hands that will protect them against the galloping instability we are witnessing these days.
The global insurance market reached $7 trillion in 2017. At this point, though, even in the case of remote ties with cryptocurrencies, insurance still poses a huge risk. One of the reasons is that the industry is tightly regulated, where all the players involved are subject to legal and financial control procedures to prove the durability of their business models and availability of sufficient funds. Furthermore, the industry is run by huge corporations that have raised the entry bar too high for the majority to qualify.
The Juniper Research center predicts that fintech platform revenues derived from supporting the insurance industry will reach $235 billion by 2021, which shows a 34% increase compared to 2016. Many experts argue that the growing cryptocurrency market will become the main stimulus of progress on the insurance landscape. Given the high volatility of this market, most investors will be interested in securing their capital from exchange rate fluctuations. The term ‘hedging’ is very appropriate to use in this scenario as a financial counterpart of insurance.
When it comes to ICOs, hedging is beneficial to both parties of a transaction. The investor reduces possible losses, whereas the ICO project raises its investment attractiveness owing to the free coverage of damage over possible drop in token value. The maximum volume of cryptocurrency hedging in the next five years is estimated at $20 billion. It’s noteworthy that the market is still anticipating some serious players to join up, and it will inevitably happen sooner or later. One of the main stimuli is the gradual shift toward virtual currencies, with the central banks of some countries reportedly planning to adopt of national cryptocurrencies.
The biggest problem boils down to building a clean and safe infrastructure aimed at addressing the enormous volatility on the market. Very few players are willing to put so much money at risk.
Meanwhile, insurance projects like BitPark have already stepped into this market. The idea of this project is to create a P2P platform that would allow all interested parties to get risk insurance while avoiding insurance giants with their unaffordable fees.
Another project – Oduwa – is a blockchain-based trading and exchange platform protecting traders against volatility. Its founders claim their Oduwa coins to be the next generation of cryptocurrency boasting security and guarantees. Instead of delivering insurance solutions, Oduwa offers a service where anyone can exchange and trade Oduwa coins with no fees. The project also introduces a system to vet new cryptocurrencies. And yet, the future success of this initiative is questionable.
The problem is, such projects are fairly far from being the perfect match for traders because their architecture doesn’t provide a basis to protect against potential risks that are the real scourge of the crypto environment. Nevertheless, one Russian project has recently hit the market with an offer that meets hedging criteria to a much greater extent than all trading and exchange platforms.
DeHedge was intended to be a hedging project from the get-go. It uses the original exchange rate of project tokens as the hedging instrument and automatically reimburses investors’ expenditures if the exchange rate of selected tokens has decreased during the hedge period. Therefore, the maximum losses equal the insurance compensation.
Here’s what Dmitri Ansimov, co-founder of DeHedge, said about the current state of this market, “A shortage of risk management tools discourages many people interested in cryptocurrencies – both newbies and professionals who treat their investments with mathematical accuracy. The growth of risk hedging instruments on the cryptocurrency market will become a new milestone of this industry’s progress that will bridge the gap between fiat and cryptocurrency world and deliver a safer experience to new investors.”
Insurance is a term that doesn’t exist on the crypto market yet and isn’t likely to emerge along with the appropriate legislation, because there is no regulation in this domain so far. Traders will continue to work in a paradigm of elevated risk unless the instruments available on traditional financial markets are transferred over to crypto platforms. In order to persevere on the market, any technology – even the blockchain – needs to prove its value to the regular consumers and businesses first. Many light-fingered individuals keep deceiving people in ICO successful exit scams creating fake identities, spreading viruses and hiding behind the best vpns. However, if the players on this market don’t get their investments secured, the whole industry may burst like a bubble. This, in turn, will slow down blockchain’s progress and send the industry into recession.