The consequences of insuring Bitcoin exchanges with fiat money. (DEC 16)

I recently wrote about scenarios in which a paradigm shift towards Bitcoin could be greatly accelerated, and this week on twitter Barry Silbert retweeted something that I needed to add to that list, Bitcoin exchanges being insured with fiat money.

The coexistence of fiat & Bitcoin in this instance makes for a fascinatingly odd couple given you can print the former ad-infium, but the latter, yeah, not so much, and it’s this that makes insuring Bitcoin exchanges for astronomical fiat figures so intriguing.

21m

You can only print on demand fiat, although of course 99% of fiat is just numbers on a screen, Bitcoin is set to cap at 21 million, to insure Bitcoin using Bitcoin you would need to use a sound fractional reserve system or such.

It’s a good job due diligence is accelerating in Bitcoin circles because here’s a simple 5 step fraud model that this kind of insurance would appear to be ripe for,

  1. Setup Bitcoin exchange.
  2. Insure Bitcoin exchange.
  3. “Oh no, we’ve been hacked”
  4. Ensure plausible deniability.
  5. Sell stolen Bitcoin into the now rife open market*

*So why would the market be rife? You may be asking, because as the insurer needs to replace Bitcoin with Bitcoin the open market which is now likely being deliberately choked off (especially if the hack is public) in order to increase scarcity and thus price has a forced buyer.

Of course insurance fraud is nothing new, people have been insuring then torching businesses and possessions for decades, what they haven’t been doing and what is possible now with this kind of insurance is appearing to lose all your Bitcoins whilst actually keeping them, and getting a fat insurance payout on top, quite literally having your cake and eating it.

The big takeaway from this is, it turns an exchange hack, a normally negative and bearish event into a bullish scenario for Bitcoin given that huge quantities of fiat insurance money is waiting on the sideline to buy and replace stolen Bitcoin, in theory, at any price.