The insurance situation confuses me. The linked page seems to indicate that only their online coins (i.e. 2% of the total) are insured. If I then click "Read More" I get: "Coinbase is insured against employee theft and hacking in an amount that exceeds the average value of online bitcoin it holds at any given time." I think this means that the 2% is not insured, but that the 98% in offline storage is. What's going on?
"Coinbase is insured against hacking, internal theft, and accidental loss in an amount that covers maximum value of bitcoin we hold in online storage at any given time."
"Coinbase is insured against employee theft and hacking in an amount that exceeds the average value of online bitcoin it holds at any given time."
Those statements seem mostly consistent to me. The only question is whether the insurance is always more than is in their hot wallet, or exceeds the value on "average" (whatever that means).
I suspect it would be difficult to guarantee the insurance would always exceed the value of online bitcoins, perhaps because the insurance is issued on the USD value and prices can fluctuate wildly, or perhaps because they can't predict when large deposits will be made (though I'm unsure if deposits go directly to hot or cold wallets)
I got confused between what kinds of losses the insurance covers versus how much it covers. Details in the reply to your sibling comment. I see what it means now.
Just looking at what you've quoted, I don't see what is confusing. Both statements say that the 2% that is stored online is insured. Specifically, in an amount that exceeds the average value at any given time.
That average bit is a bit nebulous, but it doesn't make me think they are insuring the 98% but not the 2%.
How could they lose online bitcoins beyond what they actually hold? Is the idea that if they normally hold X, and one day they hold 2X and it gets ripped off, they can get X back from insurance? Sounds pretty worthless if that's all it is.
Edit: OK, I see where my confusion lies. I kept thinking that "insured... in an amount that exceeds the average value" means that they the insurance only applies to losses that exceed the average value, but they mean that the amount of insurance coverage is greater than what they typically hold in online storage, so insurance should cover any possible losses of online coins.
In that case it all makes sense, although it seems crazy that their offline coins aren't also insured. (If offline means there's little risk of loss then the insurance should be cheap, right?)
I am just a regular guy, but I would guess it would be super expensive and borderline impossible to insure offline coins.
(a) Who in the "custom" insurance business would be comfortable with that and find it to be worth their time? Why not stick with well-understood risks, like insuring throats, fingers, humongous diamonds, and stuff like that?
(b) More importantly, stealing bitcoins that are insured is almost the perfect crime. There is too much of an incentive for the insuree to steal the bitcoins and claim insurance.
I do think these things could be overcome by an enterprising insurance agency, but insuring a huge amount of bitcoins is still going to be extremely costly.
b) it may be expensive, but most likely cheaper on a pro-rata basis than the online coins. If it's "cost-prohibitive" offer it as a market driven "add-on" service. Two products, insured and noninsured.
Your arguments apply equally well to that which is insured, unless I Am misunderstanding something somehow.
a) the same person would need to be able to take almost 50x as large a loss
b) I don't think that makes sense because I don't think having insurance for offline coins is something reasonable people are worried about, except a very, very small number. I think it's something people are bringing up to criticize Coinbase because they want to find ways to criticize them.
a) That's true but I don't think it matters here. Coinbase is small fry. Heck, all of Bitcoin is small fry. There may be theoretical cases where that insurance is impractical because of this, but there should be no problem finding an insurer that can fully insure Coinbase. For example, I'd wager that Coinbase's total assets are less than the cost of a new A380, and airlines have no trouble insuring their airplanes.
b) Why is it unreasonable to want insurance for offline coins? They're safer but they're hardly going to be invulnerable. Collusion, theft, or accidental loss can still happen. I'm not trying to find ways to criticize them (I have pretty much no opinion about them aside from what I've seen here, and a single Bitcoin transaction I tried with them once that went completely smoothly), I just find it weird that a financial company would go to such lengths to point out that they're insured, but only insure 2% of their total assets, to the point where it sounds dishonest to me.
a) yeah, but if coinbase and bitcoin are successful, that won't be true for long. I'm sure those guys are hoping Wall Street money will start coming in. If the bitcoin price spikes again, they may then have to stop being insured, which is worse than just not having it. Still, fair point.
b) Why unreasonable? Because only a really foolish person would keep a humongous amount of value stored on an exchange. There just isn't any reason to use an exchange like a bank exept laziness. The only exception here would be market makers and maybe big-time day traders who actually have a reason to keep a ton of money on the exchange at all times. Of course, those are the most valued partners/customers for an exchange. I would think it would make sense for Coinbase to make deals with such people to give them "priority" in case of any solvency problems, or to ensure them somehow on an individual basis, but I don't know for certain that that is legally viable.
So in my point (b), in some ways, I'm vindicating what you are saying. But still, for the vast majority of people in bitcoin-land, there is no reason to have more value stored in Coinbase than what you need to do whatever you are doing.
For example, for me personally, if I transfer $10k to Coinbase, I'm not paranoid enough to be worried about their offline coins being insured. And I wouldn't transfer a large enough amount of money to really impact me financially regardless. At least, not all at once; if I really wanted to do that, I would do it in stages.
The fact is, consumers behave in foolish ways, and it's up to Coinbase to protect them. Yet their default protections don't. In fact, Coinbase advertises the opposite: their advertising about "insurance" gives a false sense of security.
You're smart. That's good. I wasn't, and I suffered for it.
There just isn't any reason to use an exchange like a bank exept laziness. The only exception here would be market makers and maybe big-time day traders who actually have a reason to keep a ton of money on the exchange at all times.
Not even big-time day traders. I was a day trader, and the reason to keep money on the exchange was because it took a long time for a deposit to be recognized by the system. Longer than the market opportunities existed. As far as I know, this is true for almost all exchanges due to bitcoin requiring several minutes to confirm transfers. That's why people keep a large amount on exchanges.
