Should I Consider Cold Storage of My Bitcoin?

Cold Storage of Bitcoin is one of the hottest trends

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When I began buying bitcoin “back in the day”, the primary way to do so was with a company called Mt. Gox, which stood for ‘Magic The Gathering Online Xchange.’  As most of you probably know, Mt. Gox proceeded to lose over $600 million in bitcoin

Although a substantial amount of this was found, and it was later learned that it wasn’t all lost to hackers (the owner of Mt. Gox found creative uses for spending other people’s bitcoin), this created a significant blow to the value and credibility of bitcoin that it has not fully recovered from.

This not only impacted people’s interest in buying bitcoins from exchanges (exchanging dollars for bitcoin) but concerns such as hacking, data security and scrupulous exchange owners led many people to shy away from even getting involved with bitcoin.

However, this wasn’t going to deter those in the bitcoin community, where free market values still reign supreme, as it just led to opportunities for better ways to protect one’s bitcoin holdings.

Although most people view bitcoin storage as existing exclusively online, the reality is that offline storage of bitcoins has become one of the safest means of protecting one’s bitcoin holdings.  This type of storage is known as “cold storage.”

This type of storage can take a number of forms.  The most basic​ form is to create a paper wallet and store this information in a safe deposit box or other secure physical unit.  According to Coindesk, “A paper wallet is a document that contains copies of the public and private keys that make up a wallet. Often it will have QR codes so that you can quickly scan them and add the keys into a software wallet to make a transaction. The benefit of a paper wallet is that the keys are not stored digitally anywhere, and are therefore not subject to cyber-attacks or hardware failures. The disadvantage of a paper wallet is that paper and ink can degrade, and paper is relatively fragile – its definitely worth keeping well away from fire and water for obvious reasons. 

Furthermore, if you lose a paper wallet, you’ll never be able to access the bitcoins sent to its address.”  This article on Coindesk will provide you with the ten steps to create a paper wallet.

I prefer and use two other means of “cold storage.”  The first is through the use of a hardware wallet called the Ledger Nano.

This device looks and works like a USB device except that it contains smartcard security.  The device is slick and modern, but it also requires an additional item in the form of a security card, which displays the code needed for two-factor authentication.

There’s a process involved to store the bitcoin on the device and it requires a computer and a Chrome browser based app.  It then must be stored in a secure location as does the security card.  This may seem a bit clunky, but it does protect your bitcoin savings from online dangers and hackers.  You just have to remember where you put these darn things when you need them.  It’s cost effective at less than $45 and has become a popular accessory for many bitcoin devotees.

The other “cold storage” that I use is perhaps the simplest.  I keep my bitcoin in a Coinbase Vault, which provides me with online access but my bitcoin is actually stored at an offline location by Coinbase.  With Coinbase, I have my regular bitcoin wallet that I use for day to day uses, such as buying coffee or items online.  I view this as my checking account or debit card for bitcoin. 

I view my Vault as a bitcoin savings account.  I don’t have day-to-day access to the holdings there as they are actually stored in geographically distributed offsite locations for added safety and security.

This requires that I don’t have ready access to these bitcoin holdings and I have to wait a number of days before they can actually be moved out of my Vault account and into another account that I can readily access.  In fact, for added security, there’s the ability to cancel a vault withdrawal within a 48-hour window.

I must admit that this time constraint has been frustrating when I need to get access to these holdings but I’ve come to recognize that having this restriction is preferred to encountering another seedy bitcoin exchange owner using my bitcoin for his/her own pleasures.