Random Thoughts: Insurance and Bitcoin

A few week ago I saw an article online about the 16 trends the venture capitalists Andreessen Horowitz (of Netscape fame) are closely watching. #14 was insurance (!), #9 was Bitcoin. Time for some random thoughts on the combination of the two.

• Let’s start with some fundamentals on Bitcoin, or rather cryptocurrencies in general. As an economist, I find the “currency” moniker a bit strange here, as currencies need to fulfill three criteria [1]: they need to be a medium of exchange, a unit of accounting and a means to store value. Bitcoin is definitely the first, could be the second but fails at the third – it is much too volatile to be able to store value. That might change, but some economists argue that it would need institutional effort.
• As a medium of exchange, it has an advantage over ‘real’ money: it is really easy to transfer. For a country like the U.S. which still in parts has a rather antediluvian financial interchange system (sorry, couldn’t resist the dig – in Europe we’ve been paying wirelessly for a few decades now) that is a big thing, and the first insurer I read about that actually accepts payments in Bitcoin is American Century Life.[2]
• Another often cited advantage is the anonymity of payments. In my view for insurance, that’s really a downside, as you do want to be sure the right person is paying the right premium for the right coverage.
• Is implementing a Bitcoin interface to the legacy payment system worth the effort for insurers? For U.S. insurers I’d say probably, for others I have my doubts. For one, I am not convinced in the longevity of the system, especially once the limit has been reached, and on the other hand I am not sure how many users of the system there actually are/would be. Just anecdotally: my wife has been in business for three years now and not once has anybody asked to make the purchase in Bitcoin. Sample of 1, I know, but cryptocurrencies might be one of those areas where the echo chamber of the blogosphere magnifies the real effect.
• On the question of longevity, check out Tim Harford gazing into the crystal ball.[3]

[1] Full disclosure: While I do have a graduate degree in economics, that was a. a long time ago and b. currency theory wasn’t exactly my favorite subject

[2] Re: Storage of value, it is interesting to note that American Century Life doesn’t actually hold the Bitcoins but converts to USD right away.

[3] If economics is a foreign language to you but you are curious, I recommend Tim’s ‘Undercover Economist’ books.