Why use Cold Storage or Hardware Wallets?
So far, we’ve discussed the history of Bitcoin, and it’s strengths and weaknesses. We’ve explored the different types of Bitcoin Wallets available. We’ve warned of the potential for theft, scams, or computer hacking of Wallets, and the advisability of using Internet protection tools, such as Bitdefender or Bullguard. We’ve installed a typical wallet and discussed the need to safeguard your Seed, your Private Keys, passwords, and any other secret keys used to create the wallet, plus your Wallet’s data files. We’ve highlighted the importance of keeping all of this crucial information and any backup data files in a secure location, separated completely from the devices holding your wallet. We’ve sent and received Bitcoin from a Wallet, and talked about random bitcoin addresses. We’ve discussed the due diligence required, before you select a Bitcoin Exchange, or any other online Bitcoin service. We’ve highlighted the wisdom of starting small, by sending and receiving only a few dollars worth of Bitcoin between any Bitcoin Exchange and your Wallet, and from one Wallet to another. We’ve also looked at Bitcoin Fees, and how to calculate these using estimatefee.com. Fees are calculated and charged to the sender as your Bitcoin leaves your Wallet, so it’s best to know what these are, as they can vary wildly.
If you plan on holding Bitcoin for investment, then holding them on a Computer or Smartphone is not your only option. In mot cases, dues to the security issues involved with holding Digital Currency on Devices, that include hacking, cybercrime and theft or loss, moving your Bitcoin onto non-digital devices is a very good idea.
When Bitcoin is kept on a device connected to the internet, there is the potential for loss of Bitcoin through computer viruses, malware or hacking. Traditional Cold Storage Wallets, and the newer and more robust Hardware Wallets, such as the Trezor or ledger Nano S, get around this problem completely by removing your Wallet from Internet Connected Devices altogether, except when you need to use them. Before we explore these options, a word of warning…
Any mistakes that you might make when sending or receiving Bitcoin, or working with your own Cold Storage or Hardware Wallets, can be permanent and these mistakes are also your own responsibility. We advised you to start small, with a few dollars worth of bitcoin, when first sending or receiving Bitcoin from a Wallet. It’s also wise to do this when familiarizing yourself with Cold Storage and Hardware Wallets. If you practice by sending the equivalent of a couple of dollars to a cold storage or hardware wallet, this will familiarize you with the process, but it doesn’t risk a lot of Bitcoin, in case of mistakes. Working with Bitcoin can be complicated for the beginner or experienced computer user alike.
The most common point of failure that leads to lost Bitcoin is the Bitcoin User themselves.
The first type of Cold Storage Wallet is the Paper Wallet. This is a Wallet that must be printed on Paper. Be careful creating these, as even experienced computer users have lost Bitcoin because they made simple human errors when creating or even simply printing Cold Storage Wallets. The Paper Wallet is literally a sheet of paper onto which is printed a valid Bitcoin Address, a Public Key, a Private Key and a QR code. The reason Paper Wallets are made possible is the fact that all Bitcoin Transactions are recorded in a single large public file called the BlockChain Public Ledger. On the Blockchain, all Bitcoin transactions ever made can be traced back to specific Bitcoin Addresses; both from the sender’s wallet and to the receiver’s wallet. This is why your Bitcoin Wallet will automatically create a new and unique Bitcoin Address each time you send or receive Bitcoin, as this protects the confidentiality of your own Wallet.
These random Bitcoin Addresses and transactions on the BlockChain can be mathematically associated back to the private keys that uniquely identify every Bitcoin Wallet. It doesn’t matter if these Private Keys belong to wallets that are Digital, or exist only on a sheet of paper. Many Digital Wallets, such as Electrum, have their own built-in options that allow you to create an offline Paper Wallet. A paper wallet contains a set of Private Keys, Public Keys and a valid Bitcoin Address that you can send Bitcoin funds to, just like any other wallet. Look for the instructions for creating a paper wallet in your own Wallet’s online Help files, or on the Wallet Developer’s Website.
There are also several online sites that can create a Paper wallet, such as Bitaddress.org Bitaddress.org will generate a random Bitcoin address; complete with a valid Public and Private Key. This is essentially everything that a digital bitcoin wallet contains. Once you have a valid Paper Wallet, containing a valid Bitcoin Address, plus a set of valid Public and Private Keys, you can send Bitcoin directly to the Paper Wallet’s address, in exactly the same way as you would with a digital wallet address.
Every Bitcoin transaction is registered on the BlockChain Public Ledger, along with the sending and receiving Bitcoin Wallet addresses. When you want to access and spend the Bitcoin you have sent to your Paper Wallet, simply scan or import the paper wallet’s private and public keys into an Online Digital Wallet, such as Electrum. This will then give you access to the Bitcoin associated with the original Paper Wallet. Paper Wallets should always be stored in a secure location, such as a Fireproof and waterproof Safe, or Safety Deposit Box, completely separated from your other devices. There are many ways to create a Paper Wallet, however always do your own due diligence before selecting the best method for your circumstances, and ensure you are following trusted and up-to-date instructions. For your own security, if you print out a paper wallet, it is always best to do this using a printer directly connected to your computer by a cable.
Wi-Fi printers are not secure, and many printers include a buffer, which means that previously printed images could be reprinted. If your printer does have a buffer of stored data, make sure this is cleared after you print your wallet.
Another option for creating a Cold Storage Wallet is using a number of high-quality USB Thumb-drives or recordable DVDs, onto which you can copy your Wallet’s Data Files, Seed and Private and Public Keys. This is not always as robust as the Paper Wallet, as Digital Devices can fail or lose data for mechanical or electo-magnetic reasons. You should make a number of copies of the Thumb-drive or DVD, as this protects you from a hardware failure, but be aware that any hardware device can break, even if you have multiple copies. A more robust choice is a purpose designed Hardware Wallet, such as the Trazor or Ledger Nano S. These are the best-known hardware Wallets, but there are many other good choices available from other manufacturers on the market today, and Hardware Wallet technology advances all the time. Hardware Wallets are by far the most secure way of storing Bitcoin on any digital device. Hardware Wallets also provide built-in options for recreating your Wallet, using a secure seed phrase and password, should the original device get lost, stolen or destroyed. These devices don’t contain any operating system that might be infected with malware, but only software designed to store Bitcoin.
The Hardware Wallet is protected during daily use by passwords and pins. To use Hardware Wallets, connect them to an Online Computer that contains an App from the device manufacturer, or a chrome browser extension. This connects the hardware wallet to the Internet, and allows you to send or receive Bitcoin like a regular Wallet. They can function as a standard Digital Wallet, but only when they are physically plugged into an online computer via the USB socket. When you’re not using your Hardware Wallet, simply unplug it from the computer, and keep it somewhere safe, like a safety deposit box or safe. If the device fails, your Wallet can be recovered onto a new device using a Seed phrase, like an Electrum Bitcoin Wallet.
If you can afford Hardware Wallets, they offer far more features and security than the thumb-drive or DVD method.