Why You Should Keep Your Bitcoin in Cold Storage
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If you’re entering the world of cryptocurrency, there is one major thing you need to brush up on. It isn’t your trading skills (though that can help). No, it is your security. Bitcoin, Ethereum, and other cryptocurrencies are kept in wallets, just like your regular cash. Except these are digital wallets, stored on your computer.

There are different type of wallets, used at different times. Sensible people keep their Bitcoin offline, in a cold storage wallet. But how does this increase security, and what are your options?

What Are Cryptocurrency Wallets?

First off, let’s establish what cryptocurrency wallets are 8 Things You Probably Didn't Know About Digital Wallets 8 Things You Probably Didn't Know About Digital Wallets Digital wallets are billed in most tech circles as the future of real-world payment technologies. Read More .

Wallets are essential to storing and “hodling” (which means “hold on for dear life” in cryptocurrency speak, after it was spelled wrong on a forum). I bought my first Bitcoin on Coinbase, an extremely well-known cryptocurrency broker. Bitcoin was immediately deposited into a Coinbase-created wallet after my fiat currency cleared.

My Bitcoin is somewhat secure — but not 100 percent. You see, the Coinbase wallet doesn’t belong to me. Furthermore, the Coinbase site hosts it. I don’t have access to the private cryptographic key. I’m not saying Coinbase is planning anything nefarious (they’re a trusted pillar of the crypto-world), but things go wrong.why keep bitcoin cryptocurrency in cold wallet storage

Mt. Gox is a name that evokes many negative connotations. Why? Because in February 2014 the Mt. Gox bitcoin exchange was compromised. Over 850,000 Bitcoin was stolen ($450 million at the time, $5,950,000,000 at the recent record-breaking market high of over $7,000 per Bitcoin), with only 200,000 recovered since that time. Evidence released in 2015 made it clear that “most or all of the missing bitcoins were stolen straight out of the Mt. Gox hot wallet over time.”

In short, a vast number of people holding Bitcoin on the third-party Mt. Gox exchange lost out.

Different Types of Crypto-Wallets

There are several different of bitcoin and cryptocurrency wallets. For now, we’ll examine the specifics of each wallet type, and when you should use each type.

  • Hot wallet: A hot wallet is considered to be one connected to the internet. The Coinbase scenario above uses a hot wallet. If you keep your Bitcoin on the exchange where you bought it, you’re using a hot wallet. A hot wallet is extremely useful for making quick payments, trading on crypto-exchanges, and so on. Online web wallets are also considered hot wallets, as they are only accessible via the internet.
  • Desktop wallet: A desktop wallet is designed to be downloaded and installed on your desktop. Desktop wallets are handy for managing your cryptocurrency when you’re offline. Some wallets double up as nodes in their respective blockchain networks.
  • Mobile wallet: Like a desktop wallet, a mobile wallet is downloaded and installed on your smartphone. There are various wallets available for iOS and Android. Mobile wallets are considered “hot” as your smartphone is readily accessible via a data connection at most times.
  • Hardware wallet: A hardware wallet is considered to be an offline physical device, such as the Trezor wallet. A hardware wallet works like a minute portable safe. But they can also send and receive transactions online when required. A hardware wallet is considered a cold wallet (see below).
  • Cold Wallet: A cold wallet, also referred to as cold storage, is an offline wallet. You only connect the wallet to the internet to send and receive cryptocurrency. This ensures no one can hack your Bitcoin, and so on.

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Cold Storage = Storage Security

As mentioned previously, the Mt. Gox exchange had 850,000 Bitcoin pilfered from its hot wallet. But they’re not the only exchange that has suffered a huge theft. They just happen to be the largest, and best known. (How to avoid common crypto-scams! 5 Common Cryptocurrency Scams and How to Avoid Them 5 Common Cryptocurrency Scams and How to Avoid Them If you're interested in investing in the somewhat risky world of cryptocurrency, there are a few common scams you should be aware of. Here's how to avoid being caught out. Read More ) Other exchanges have simply upped and gone, taking everyone’s cryptocurrency with them — every single coin.

That’s why anyone serious about cryptocurrencies keeps the vast majority of their coins offline, only transferring when required. There a few different offline cold storage options available to you, as well as different wallets to consider.

USB Drive

One favored by many enthusiasts is the encrypted USB drive How to Password Protect Your USB Sticks: 3 Easy Ways How to Password Protect Your USB Sticks: 3 Easy Ways USB thumb drivers are small, portable, and easily lost. We'll show you the easiest ways to password protect sensitive files and folders on your flash drives. Read More (or another removable storage device).

Pros

  • Easily transportable
  • Simply encrypted
  • Easily stored in another location (safe deposit box or similar)
  • Usually readily available

Cons

  • Susceptible to damage
  • Cannot be easily restored
  • Easily lost or stolen
  • Susceptible to malware

Paper Wallet

A paper wallet is a single address written or printed on a piece of paper How To Print Out Bitcoins (aka Making A Paper Wallet) How To Print Out Bitcoins (aka Making A Paper Wallet) There are a few reasons why you might want to store your Bitcoins in a physical format. Read on to find out why, and how, to make a Bitcoin paper wallet. Read More . Using paper wallets for day-to-day transactions and trading is strongly discouraged (as well as utterly impractical). However, as a form of cold storage, paper wallets work well.

Pros

  • Can be generated securely
  • Easily transported
  • Not typically exposed to malware
  • Can be given as a gift
  • Costs very little
  • Easily stored in another location (safe deposit box or similar)

Cons

  • Extremely susceptible to damage
  • Easily lost or stolen (or even simply photographed)
  • Potential for theft during generation and printing
  • Susceptible to human errors in handling and storage
  • Degrades over time

Bearer Items

Instead of a USB drive or a piece of paper, some choose something physical and tamperproof. Specifically, physical bitcoin wallets store bitcoin securely offline, hiding the private key needed to access or transfer the funds. When you want access to the wallet address, you break the coin open. Physical Bitcoin devices have existed almost since the inception of the currency.

Pros

  • Easily transportable
  • Can be preloaded with currency
  • Contain tamper-proof holographic seal (or equivalent)
  • Easily redeemable as physical currency
  • Easily stored in another location (safe deposit box or similar)

Cons

Hardware Wallets

Hardware wallets are the evolution of software wallets into a secure physical object. A hardware wallet should only serve one purpose: protecting your cryptocurrency. The most popular market option, the Trezor, has removed everything that could be hacked. Furthermore, it implements extremely strong encryption Don't Believe These 5 Myths About Encryption! Don't Believe These 5 Myths About Encryption! Encryption sounds complex, but is far more straightforward than most think. Nonetheless, you might feel a little too in-the-dark to make use of encryption, so let's bust some encryption myths! Read More , as well as using lengthy passphrases instead of passwords.

Pros

  • Relatively safe from malware and hacking
  • Easily transportable
  • Secured with strong encryption
  • Backups and recovery possible
  • Continually tested and upgraded
  • Easily stored in another location (safe deposit box or similar)

Cons

  • Potential for loss or theft
  • Potential for malware, minimal chance of hacking
  • Can be physically damaged
  • Can forget lengthy passcodes or passwords (but there is a recovery mechanism)
  • Most hardware wallets are open source, allowing user to vet code and device operation
  • Not free

Deep Cold Storage

A final storage option exists, combining other cold storage options. Deep cold storage refers to a wallet that is only ever used to send coins to. In some cases, the deep cold storage is maintained by specialist brokers at a physical location that actually insure the cryptocurrency held on the wallet (so long as there is proof of funds, of course). All of the aforementioned cold storage types are feasible deep cold storage options. An encrypted drive/hardware wallet placed in a safe deposit box is one of the most popular options.

What’s the Best Cold Storage Option?

How you handle your cryptocurrency lies with your activities.

  • Small and frequent transactions: Online or software wallet containing small amounts.
  • Cryptocurrency exchanges: Online wallet with only your trading money, cashing out the majority of your funds at the end of your day.
  • Big transactions: Hardware wallet.
  • Storage only: Hardware or paper wallet.

Furthermore, you shouldn’t keep all of your cryptocurrency in a single wallet, digital or physical. It is asking for trouble. You wouldn’t head to a shopping mall with $10,000 in a single wallet. Cryptocurrencies are the same — protect your potentially life changing investments Is There Ever a Safe Time to Invest in Bitcoin or Ethereum? Is There Ever a Safe Time to Invest in Bitcoin or Ethereum? There will always be a measure of risk when "investing" in Bitcoin, Ethereum, or any other form of cryptocurrency. However, that risk can be managed. Here's how to do it. Read More !

Do you use a cold wallet, or do you keep your cryptocurrencies online? Are you considering a cold wallet? Tell us below.

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  1. dragonmouth
    November 24, 2017 at 2:01 pm

    The cryptocurrency craze is no different from the Tulip Craze in Holland in the 17th century and it will end the same way.