There are lots of ways we risk loosing our money one of the biggest is when the institutions we trust to keep those funds safe fail to do so.
This happened in the United States during the Great Depression when widespread bank failures destroyed lifetimes of savings overnight.
To address concerns of this happening again the FDIC and NCUA were created in the 1930s to provide assurances that if such an event were to happen again their savings would still be safe and even this has its limits.
This along with regulations that were put into place around minimum liquidity and other practices are what helped people begin to regain trust in the US financial system.
The fall of Mt. Gox and other smaller exchanges has once again introduced similar concerns but thankfully the influx of venture capital to the Bitcoin ecosystem has brought in a new class of organizations who have both the skill and capital to run more professional institutions.
As a result we now are seeing vault services starting to offer similar insurance via self-insurance programs coordinated with underwriters such as Lloyds of London and Meridian.
This is a huge step forward but there is a long way to go before these offerings are viable because as they stand today its far from cost-effective. As an example lets look at Elliptic if we were to store $250,000 USD of Bitcoin (510.58 BTC at todays price) you would be paying $5,064 USD every year for that peace of mind.
That’s not to suggest everyone needs $250,000 of insurance or that this is not a “reasonable” fee for this service but the reality is the price for this assurance has been established and its FREE.
Vaulting services such as Elliptic and Xapo are also a little different than traditional banks because they do not (for the most part) offer other services. Additionally building and operating services that provide the necessary assurances to qualify for such insurance comes at a cost above and beyond the cost of the insurance itself so a premium of some sort must be charged. The costs here are sure to go down as they get amortized across more customers but regardless the current cost structure these services are based on are out of reach of mainstream users.
Making this insurance more accessible will be necessary for us to see this broader adoption of Bitcoin along with many other changes that will include regulations (either self enforced like the NCUA or government mandated). This will include things like reporting requirements, minimum liquidity levels, operational practices, key management requirements and insurance.
When it comes to insurance I think we will also see it become a “freebee” just like in the classical financial institutions where its costs are built into the profit model of the institution. Today classical financial institutions cover these costs via account maintenance fees, transaction fees, the profit they make on the money they hold for others (via fractional reserve banking) and the overall revenue diversity in their business models.
In the meantime the insurance these vaulting services offer fill a market need for those with large amounts of Bitcoin and but not the time or skill to protect the keys themselves.
The irony is of course it’s the little guy who likely needs the insurance more.