What is Cold Storage in Bitcoin
Bitcoin is decentralized, therefore, owners have much of the responsibility to store their bitcoin assets. Restoring lost bitcoins is a virtually impossible task since there is no one you can call to help you do so. Therefore, as a security-conscious bitcoin holder, you should look for the safest way to store your bitcoins. This is where bitcoin cold storage comes in.
Cold storage is not just used by individual bitcoin investors. Crypto exchanges and some companies behind the best bitcoin stocks also prefer this method of storage to protect their users’ bitcoin assets. But, what is bitcoin cold storage? How does it work? And what makes it safe?
What is Bitcoin Cold Storage?
Bitcoin cold storage is any bitcoin wallet that is not connected to the internet. Therefore, hackers cannot access the wallets. Generally, bitcoin cold wallets are non-custodial, meaning you solely own and control your private keys. Bitcoin cold storage comes in different forms, including hardware wallets, brain wallets, USB sticks, encrypted data storage devices, and paper wallets.
Hardware bitcoin wallets are physical storage devices that connect and interact with your devices such as PCs and mobile phones. These wallets are designed to protect your private keys even when you are interacting with compromised computers. Therefore, you can use them safely even with public computers. A hardware wallet requires compatible software or a webpage on the connected computer to allow you to interact with your computer. However, they sign transactions “in-device”, meaning your private keys never leave your wallet device. This feature makes the wallets impossible to hack even when there are used with online devices. Some of the popular cold wallets are Ledger, Trezor, and KeepKey.
Paper wallets are just pieces of paper with wallet private keys printed on them. Since paper wallets are 100% offline, only the person that accesses the paper can steal your bitcoin. However, these wallets are easily destroyed. You can generate multiple copies and keep them separately to act as a backup in case you lose one.
A USB flash drive is an alternative way to store your bitcoin offline. However, this method is not as safe as the hardware wallets. USB flash drives cannot sign transactions “in-device”, meaning your private keys will have to leave your cold storage wallet when signing transactions. This creates vulnerability since an attack on your computer during transactions may lead to the loss of your bitcoins.
Encrypted data storage devices stores data in encrypted forms such that no one can read the data without having the appropriate key or password. The method is more secure than a paper wallet and
What is Deep Cold Storage?
While cold wallets are in themselves safe, storing these wallets in a safe is another significant factor in securing your bitcoin assets. Deep cold storage involves taking your cold storage and making it harder to access. It is a very inconvenient storage method that requires time and effort to access your private keys. Examples would include burying your cold wallet six feet down in your garden or storing your wallet in a third-party vault that requires several steps to access.
Burying your key in the garden is safe but presents several risks. You may forget the exact location you buried them. Also, the wallet may be destroyed.
Using vault storage is much safer. However, these services may include long identification processes that may take hours or even days to retrieve.
Bitcoins stored in deep cold storage are not readily accessible. Therefore, the method is not suitable for someone doing frequent transactions that require private keys. However, it can be the best method to protect a large bitcoin portfolio held for the long term. The method is also used by trustees holding bitcoin for others, such as custodial exchanges.
Challenges with Bitcoin Cold Storage
The debate on bitcoin cold storage and hot storage often revolves around security and convenience. Generally, cold storage wins in terms of security. However, it falls behind hot bitcoin wallets when considering the ease of access. Cold storage requires that you carry your hardware wallet wherever you are going if you are to make transactions anytime anywhere. This process is cumbersome. Additionally, you risk losing your hardware wallet if you keep carrying it around. Other risks include storage damage.
Cold storage offers a highly secure option to store your bitcoins. Yet, you must implement it carefully, otherwise, you still risk losing your funds. Back up your private key to avoid losing your bitcoins. Also, determine the type of cold wallet that is suitable for you.