Bitcoin as Long-Term Insurance

Seeing Bitcoin as insurance means: you pay a small premium to be protected against rare but large damage to the rest of your wealth. That damage is the slow debasement of money over decades, bank crises with frozen accounts and, in the extreme, a currency reform. The premium is the part of your wealth held in Bitcoin, and you size it like any insurance: so that you can live with losing it if the damage never happens. Unlike a real policy, however, Bitcoin gives you no contract, no guaranteed payout and no protection in a stock market crash.

What percentage of Bitcoin fits your wealth is worked out with a crash test in Bitcoin Share in Your Portfolio. This article takes another view of the same number: what damage should this share cover, and what not?

What makes insurance insurance

Home contents insurance works on a simple principle. You pay a small amount every year. Usually nothing happens and the money is gone. But if your flat burns down, you get many times that back. Nobody is annoyed that the flat didn't burn.

Three features make good insurance:

1. It covers damage you can't carry yourself. You'd better not insure a broken phone, but the house burning down, yes.
2. The premium is small relative to your wealth. It doesn't hurt, even if it lapses for decades.
3. It pays exactly when everything else suffers. Insurance is valuable because it pays out in the opposite direction to the damage.

Bitcoin meets the first feature for certain risks, the second only if you size it that way, and the third only over long periods. That is what the next sections are about.

Which risks Bitcoin is meant to insure against

Most people in Germany, Austria and Switzerland hold their wealth largely in money claims: bank account, fixed deposits, bonds, life insurance, pension fund, state pension entitlements. All of them promise an amount in euros or francs. Bitcoin is meant to insure against three risks to these money claims.

Slow debasement. The European Central Bank aims for 2 % inflation a year, the Swiss National Bank for price stability below 2 %. Even at 2 %, purchasing power halves in about 35 years. In practice it went faster: how much the euro and the franc have lost since 2000 is shown in Inflation and Loss of Purchasing Power. Bitcoin, by contrast, has a fixed maximum supply of 21 million that no central bank can raise.

Bank crises and frozen accounts. In March 2013 Cyprus closed its banks for almost two weeks. Customers of the Bank of Cyprus lost almost half of their deposits above €100’000, which were converted into bank shares. Capital controls remained in place for another two years. In June 2015 Greece closed its banks for three weeks, and ATMs paid out at most €60 a day. Bitcoin in your own custody sits at no bank and cannot be frozen by a bank holiday.

Currency reform. On 20 June 1948 the Reichsmark was replaced by the Deutsche Mark in West Germany. Everyone received 40 Deutsche Mark per head, and savings were in the end converted at 100 to 6.5. Anyone whose wealth was in a savings account lost more than 90 %. That is an extreme case after a lost war. But extreme cases are exactly what insurance is for. What hyperinflations looked like is described in The History of Hyperinflation.

The premium: sizing your Bitcoin share like insurance

With insurance you don't ask: "What does it earn?" You ask: "How much am I willing to pay without getting it back?" The same question fits Bitcoin.

The key difference from the crash test: for an insurance premium you count on a total loss. Bitcoin could fail through a flaw in the protocol, a worldwide ban or better technology. We consider that unlikely, but nobody can rule it out. If you hold Bitcoin as insurance, ask yourself: if this amount goes to zero, does anything change in my life?

This gives a simple rule: the premium is the amount you can lose entirely without changing your plans. For most people that is a few percent of their wealth. If you hold more, you hold Bitcoin not only as insurance but also as a bet on its success. That is legitimate, but then the crash test with −80 % is your upper limit, not insurance logic.

Worked example: how much protection a premium buys

Say you have €300’000 in total. €200’000 of it is in money claims: bank account, fixed deposits, bonds and the surrender value of a life insurance policy. The damage you want to insure against: over ten years, inflation averages 5 % instead of 2 %. The euro then buys about 40 % less at the end. Your money claims lose about €80’000 in real terms.

How much would Bitcoin have to rise in real terms for your Bitcoin share to exactly offset this damage?

The table shows the dilemma of all insurance. A small premium doesn't hurt, but only covers a lot if the insurer, here the Bitcoin price, pays a great deal. A large premium covers the damage with a moderate rise, but costs noticeably in the bad case.

Nobody promises you that Bitcoin will deliver one of these factors in such a decade. The range the Power Law model shows for the coming years is on the Power Law page. It is a model of the past, not a promise.

Why the premium doesn't lapse every year

Here Bitcoin differs from any real insurance, in both directions.

The upside: an insurance premium is gone the moment you pay it. Your bitcoin stay. If the damage never happens, you still have an asset that has risen far more than the rest over the past 15 years. The premium can multiply even without a crisis. In economic terms, Bitcoin is more of a long-dated option than a policy.

The downside: in the damage case, insurance pays a contractually agreed amount. Bitcoin pays whatever the market offers that day. There is no contract, no insurer and no regulator standing behind the payout. On top of that, your "premium" swings hard: in every major bear market Bitcoin fell 77 to 93 %. Insurance whose value halves before the damage happens doesn't feel like insurance.

What Bitcoin does not insure

Insurance is only as good as your knowledge of what it doesn't cover. With Bitcoin the list is long.

A stock market crash. In the short run Bitcoin often falls with shares, not against them. On 12 March 2020 the S&P 500 fell 9.5 %, Bitcoin about 40 %. Precisely when investors sell everything that swings, they sell Bitcoin too. How close the link is, is shown in Bitcoin Correlation. Bitcoin is no insurance against a stock market crash.

Job loss, illness, liability. These are the damages that really ruin most people. For them there are real insurance policies and an emergency fund in euros or francs. Bitcoin is too volatile for these cases: if you need the money in the wrong year, you may be selling 60 % below the last high.

Bitcoin's own risks. A lost seed phrase, theft, fraud, an exchange collapse. Bitcoin insures you against the bank, but not against yourself. How to keep these risks small is in Storing Bitcoin Safely.

The reach of the state. A state cannot switch Bitcoin off, but it can require holdings to be reported, close exchanges and compel people to hand over coins. Bitcoin on an exchange or in an ETP is as reachable for the state as a bank account. Self-custodied bitcoin are harder to reach, but you remain a person with an address. What gold ownership in 1933 teaches about this is in Can Bitcoin Be Banned?.

Your own panic. The best insurance is useless if you cancel it just before the damage happens. If you sell Bitcoin in a bear market at a 70 % loss, you have paid the premium and given up the cover.

The opposing view: is Bitcoin a hedge at all?

Not everyone sees Bitcoin as insurance. You should know two prominent dissenting voices.

Nassim Nicholas Taleb, who coined the idea of rare extreme events with "The Black Swan", initially thought Bitcoin was a good idea. In 2021 he wrote in the journal Quantitative Finance that Bitcoin is no protection against inflation or crises: its value depends on people continuing to run and use the network indefinitely, and it is too volatile to serve as a store of value.

In November 2022 the European Central Bank wrote on its blog that Bitcoin was on the road to irrelevance. The price was around $16’000 at the time. It has multiplied since.

Both objections have a kernel of truth: Bitcoin has not yet had to prove its role as a hedge in a real currency crisis in Europe. It has only 17 years of history, and no hyperinflation in a major industrial country in that time. If you hold Bitcoin as insurance, you are betting that it will behave in the damage case the way its properties suggest. That is exactly why only a premium belongs in it, not your whole wealth.

Your Bitcoin insurance in five steps

1. List your money claims. Bank account, fixed deposits, bonds, life insurance, pension fund. This is the wealth you want to insure against debasement.
2. Define the damage case. For example: ten years at 5 % inflation. Work out how much purchasing power your money claims would lose.
3. Set the premium. What amount could you lose entirely without changing your plans? That is your insurance share.
4. Keep the policy safe. Insurance against bank crises doesn't belong on an exchange. Self-custody, with a safe backup of the seed phrase.
5. Keep the premium within limits. If the share grows far beyond your premium, sell part of it following a rule. If it falls, top it up instead of cancelling.

How to build up your share over the years with a savings plan can be played through in the savings plan calculator.