Originally written for : http://www.bitfolio.org/bitcoin-insurance
There are many articles out there which explore what is bitcoin and how it should be classified. There are lot of debates going on as different people consider it different things. Once you read those articles you will realise that bitcoin is classified any on of these.
- Store of Value : Gold 2.0
But I think it will also fall under a new category : Insurance. Let me explain.
Recently when I was speaking to a friend of mine, we were discussing if Bitcoin was overpriced and if it makes sense to invest in Bitcoin. While we agreed that it might be overpriced at the moment I was sure that it will be much more valuable over the time. While I conveyed my thoughts to him I was not confident enough to make a recommendation to him.
He was sceptical. But being friend I wanted to convince him as I feel that Bitcoin/Cryptocurrencies have great potential. So I told him this : Start investing small amounts in “Bitcoin as insurance”. Suddenly it made sense. It is like you are paying a monthly premium. In the event of Bitcoin going bust you lose your premium. But if Bitcoin gains adoption over the time you have made share that you have not missed the boat. To make it easier for him to understand from his sceptical point of view I gave the following explanation.
Bitcoin as insurance
“I am pretty sure that cryptocurrencies will gain wide adoption in couple of years. You have also agree that cryptocurrencies will gain adoption over the time but you are not sure about the pace and hence you feel that Cryptocurrencies/Bitcoin are overpriced at the moment. But you are not sure when. The analogy is similar to Life insurance. Everybody knows that they are going to die but they are worried about untimely death and want to safeguard their dear ones from the same. You keep paying premiums to make sure that your dear ones are taken care if the inevitable happens immediately. Consider the same with respect to Cryptocurrencies. That distributed money will replace Fiat is inevitable. It is about when that is going to happen. So that makes it an interesting proposition. The inevitable event is Fiat Failing. So you are paying the premium to insure yourself from being left with Fiat that is of no value. And what more you are paying the premiums with the same Fiat. So the more confidence you have that Fiat will be replaced by Cryptos that more premiums you should pay. Since you are not confident now start paying lower premiums for now. Spend time to educate yourself. Once you start feeling confident increase your premiums.”
What is insurance
"An arrangement by which a company or the state undertakes to provide a guarantee of compensation for specified loss, damage, illness, or death in return for payment of a specified premium." as mentioned in dictionaries. In our scenario a single actor plays multiple roles so it can be little confusing. Let us try to separate the entities to have clear understanding.
"A company or the state undertakes to"
In our scenario blockchains go against the concept of state or central authority. So in our case people in general replace the state as authority. If you are looking at the "A company or the state" that pays the compensation then it will be Bitcoin(or cryptocurrencies) itself/themselves as they will pay you.
"provide a guarantee of compensation"
In our scenario this will be appreciation in the value of Bitcoin. When we say "appreciation of value", it could either be in inherent value which is purchasing power or it could be in comparison to the "Fiat money". If we are comparing against the "Fiat" then this could be exponential as purchasing power of Bitcoin will increase over the time and purchasing power of Fiat will decrease over the time.
"for specified loss, damage, illness, or death"
In our scenario the loss will be loss of confidence in central authorities, damage will be damage to our trust, illness will be the illness of capitalism that we couldn't address before blockchains and death is the death of FIAT which is driving the above all.
"in return for payment of a specified premium"
In our case the investments we do in Bitcoin will be the premium. It is funny that we are insuring ourselves against the death of FIAT and we are using FIAT to pay the premiums. Generally with increasing risk the premiums also increase. In our scenario the risk is FIAT failing, if you are more confident that FIAT will fail and will fail fast then the risk is more and hence your premiums should also be high.
By the end of the conversation he was convinced. I was happy to come out with an analogy that made sense to him. If you find any naysayers give them this analogy and see if makes sense to them.
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