How Did We Get Here?

There has been an explosion in interest in the stock market post panic pandemic. Not just your traditional stocks, the ones sold and managed by big stocks exchanges, but also in the emerging open digital markets of crypto. Virtual currency like Bitcoin, Ethereum, and Dogecoin.

If you’ve been paying attention, you may have also noticed a crackdown on stocks lead by the Internal Revenue Service (IRS). The IRS has categorized stocks as assets. Assets, like cars, houses, and other valuable property, can either be taxable and non taxable. As such, stocks are taxable assets according to the IRS. Why?

What’s made the IRS include stocks, and more trendily, crypto currencies, as taxable assets has been their growing cultural relevance, and the fact that they appreciate in value. Since you exchange money to hold a shares/percentages of a company or digital currency, and that money is subject to growth due to market forces, one could potentially make a sizable profit off of stocks annually. With so many success stories in the media, people are jumping to get in on a possible young, stable and open market. And it’s no wonder, there are hundred of success stories of overnight thousands and even million being made, particularly referring to crypto currency like Bitcoin.

With entities such as the IRS taking some currencies seriously now, and various other business entities already taking the virtual currencies as payment, there’s much hope that it will be standardized as a norm in society.

Now, the question: Will I be able to insure my stocks and crypto?

All things considered, if you were to ask your typical insurance agents if your stocks and crypto currencies were insurable, they would flat out tell you a resounding “No.” However we are here to tell you a cheerful “Probably, but then again maybe probably not.”

Stocks have been around for a long time, and already has well established practices for insuring losses. When it comes to stocks, there is a clear answer, but lots of ifs and buts. Insurance companies have long recognized the potential lucrative market that emerges from the buying and selling of shares in company.

Traditional EFTs sold on the stock market and through various apps like Robinhood, Etrade, and Fidelity, are a well documented case. Crypto currencies, not so much.

Your best bet of getting insured on stock options, is purchasing of a special policy for such options. Though maybe it wouldn’t be worth it unless you had a large amount of money. Let me explain. The cost of such insurance is largely dependent on 2 factors:

• Percentage of Coverage
• Deductible

The price of the insures is depending on the terms of the policy regarding the two above agreed limits.

If you for example have 80% coverage on a stock of $1,000 then your expected return upon a loss would be $800. But unless you have a 0% deductible, you will have to pay a percent of the loss before insurance makes returns available. Using this example, one could say that there is a 20% deductible of the original $1,000. There are a variety of arrangements that can be made with specialty insurance companies, though the type of stock insurance most opt for, is done directly with financial institutions.

Financial institutions allow for investors to make investments where involved parties agree to conditions. Put options have made the news recently with the GameStop fiasco. Essentially a Put Option is an agreement that allows put option buyers, the right to trade with put option sellers, assets that they had previously bought. At the point of the original sale, the asset was valued at a certain price (x). The put option contract promises a return of it’s original value. Thus, if the price of the asset drops, and the put option buyer who bought the asset trades the asset back to the seller, they may no longer have the asset, but they net a profit based on how much the asset dropped in profit.

Typically, put options are used to prevent against heavy losses, not explicitly considered insurance, but if the possibility of a drop in the assets price seems real to an investor, they might feel better about purchasing put options.

What about Cryptocurrencies?

Over the past decade, there has been a steady and now explosive popularity in virtual currency marketplaces. With people investing and getting returns of hundreds, thousands, and even millions of dollars off of these digitally owned assets, it’s only a matter of time before a stable business model emerges around the phenomenon.

Various financial media outlets are already pointing out the massive potential that cryptocurrencies have. Considering the nature of the beast that is blockchain technology, and demand based value, insurance companies and financial institutions had never commented or seemed to take cryptocurrencies seriously. That is until the beginning of 2021. And it’s still developing.

American express has commented on it’s excitement to adopt blockchain technology. While acknowledging the undeniable benefits a loose and open market, they did note the risks of cryptocurrencies. These risks include:

• Lack of regulation, which makes the marketplace ripe for exploitation.
• Security Issues, where hackers can untraceably and effortlessly clear out wallets if they gain access to them.
• Supply of Crypto Insurance, meeting with the demand of crypto insurance, is not friendly to buyers.

It seems like the insurance market expanding to accommodate the markets growing interest in assets like stocks and cryptocurrencies is inevitable. There are challenges that must be overcome, and data to be analyzed in order for insurance providers to comfortably and consistently provide this insurance. This opens a whole new door to potential fraud and technology that most people don’t fully understand.

Thanks for reading. Soliz Agency is a Property and Casualty Insurance Agency, that also offers Tax and Notary services all in the state of Texas. Please explore our website and consider our services. We promise we won’t disappoint.