Insurance for Crypto Trading

The title must be sounding interesting or confusing or impractical, right? I am not sure if there is any insurance product available in the market that protects traders from trading losses, however, there are products that protects investors from crypto thefts. This thought came to me during my crypto trading journey.

Lately, I have been too much involved in crypto trading, especially Futures, although overall I am in losses after having seen profitable days as well. And that is when the thought triggered that why isn't there any insurance provided on my trade? Afterall, the data that is required to analyze my profile is already present in the trading platform, so all what the insurance companies need is a great risk profiling to offer me insurance.

That is when I started playing with the LLM models through prompting, to find out if this use case can be built or not.

So what is the Product Concept?

The insurance company charges a dynamic premium per trade based on multiple risk factors. If a trader incurs a significant loss beyond a pre-defined threshold, a percentage of the loss is covered.

And what are the coverages and exclusions?

Coverage Scope

• Covers a portion (say 30%-50%) of the net loss per trade.
• Only applicable when pre-set conditions are met, such as stop-loss execution.
• Compensation is credited directly into the trader's exchange wallet.

Exclusions

• High-leverage trades (e.g., >20x).
• Trades that don’t have a proper stop-loss.
• Losses due to exchange failure, hacking, or fraud.

What can be the factors on which Premiums can be decided?

1. Trade Size & Leverage: Higher leverage = Higher risk = Higher premium.
2. Trader’s Historical Win-Loss Ratio: Consistently losing traders pay a higher premium.
3. Stop-Loss & Take-Profit Settings: Disciplined traders get discounts.
4. Market Volatility Index: Higher volatility increases the premium.
5. Trading Behavior (Consistency, Frequency, Risk Appetite).

Example of a Premium Calculation Model:

Premium=(X%×Trade?Value)+(Y%×Leverage)+(Z%×Historical?Loss?Rate)

Where X, Y, and Z are dynamic percentages based on market conditions.

How can Insurers Leverage from this?

If the Insurers are able to crack the underwriting and pricing for per trade premium, then it can be a great next Digital product for them.

• Wider Customer Base: Micro-premiums collected from frequent trades ensure volume-based profitability.
• Risk Pooling: Since most traders lose money over time, as they usually do not follow said trading principles and guidelines, the collected premiums will outweigh payouts.
• AI-Based Risk Assessment: Using ML models to fine-tune risk scoring and prevent over-exposure to high-risk traders.
• Limited Payouts: Only partial loss coverage ensures a cap on insurer liability.

So how does a typical trade journey look like?

• I take a trade (say XRP/USDT) for a Long position with a certain capital and leverage.
• As soon as I put my Quantity, Stop Loss and Take Profit levels, the trading platform tells me the Insurance Amount for that trade, if I am eligible for the insurance for that particular trade, which will help me cover a certain percentage of loss, if the Stop Loss is hit.
• If my trade is profitable --> The entire premium amount goes to the Insurer
• If my trade is a loss making one --> I get the X% coverage as an instant payout in my wallet

There are millions of traders across the world in various markets (crypto, stocks, forex, commodities, etc.) and they will only grow in future. Imagine the trade volume that gets generated and all of it is without insurance today!

With all the Gen AI tools, Blockchain networks, ML Modelling and state of the art technical infrastructure, if Insurers are able to crack this next and potential Digital Product, it can be the next best revenue source for them. Besides, it will also be psychologically helpful to the traders and make them more disciplined.

Overall, it will only help improve the ecosystem.

So what do you think? Do let me know in comments!