Take Control of Your Crypto with Cold Storage
“If you don’t own your private keys, you don’t own your Bitcoins.”
This is the most important phrase for any cryptocurrency investor to understand. The advent of cryptocurrencies and all the benefits surrounding it comes with the cost of added responsibility. Currently, we trust our funds to be held with banks, escrows, or other third parties. This inherently gives power to these institutions, allowing them to charge high fees, loan our money for their own profits, or worse — freeze funds. Thankfully, cryptocurrencies have introduced a way for people all over the world to regain control of their money in the digital age.
Cryptocurrencies, such as Bitcoin, are stored in wallets, which have both public and private keys. The public key is similar to your debit card number; you can tell anyone this number and they can wire you money. Unless they know your PIN number, analogous to a wallet’s private keys, they cannot withdraw your funds. This means that private keys are what provides you with control of your funds, enabling you to withdraw and send money whenever you wish.
Understanding how to keep your private keys safe is of the utmost importance but generally misunderstood.
What If I Keep My Coins on an Exchange?
Exchanges are no different than banks or any other third party. If you send them your Bitcoin, then they have complete control over your funds. They own your private keys which means that they decide whether or not to comply with your requests to withdraw funds. In other words, keeping your funds stored on an exchange means that you are holding an IOU for your funds until you transfer them to a personal wallet.
Additionally, exchanges are less secure. If the exchange is compromised by a hacker, then it is likely that your private keys are also compromised, and thus, your funds are gone. Historically, exchanges have been shut down by governments, founded by scam artists, or hacked to insolvency.
If you are unfamiliar with the Mt. Gox story, we highly recommended reading up on it. Exchanges are one of the most insecure ways to store your cryptocurrencies and we recommend only using them for short periods of time.
Why is Cold Storage Better?
Any professional investor who wants to hold their cryptocurrencies for long periods of time turns to cold storage. It is a way for you to keep your funds offline, protecting you from hackers or computer malfunctions. The only way your funds can get stolen is through physical robbery, but even this is not practical for the thief if your offline devices are password protected.
The primary options for cold storage are: Paper wallets Desktop wallets USB drives Hardware drives
A paper wallet is a piece of paper with your public and private keys printed on them. The main advantages to paper wallets are that they are free to use, and easy to store safely.
The disadvantage to paper wallets is that paper can easily be burned, damaged, or lost and your funds cannot be restored. As a result, it is not the preferred method for cold storage.
Desktop wallets are a popular method for offline cold storage, but in our opinion, is one of the least secure ways. Desktop wallets are downloadable pieces of software. The advantage to desktop wallets is that they are quick and easy to access, but unlike paper, hardware or USB stored wallets, desktop wallets are digital. This means they are prone to hackings or personal computer malfunctions. They also cannot restore funds, generally.
Additionally, if the wallet, along with your private keys is connected to the internet, then your holdings are no longer in cold storage.
Some people choose to store their private keys on a USB drive. This works, but much like paper and desktop wallets, they cannot be restored if your funds are lost and can be wiped out from magnets or water damage. Much like the desktop wallets, if you load your wallet your USB and connect to the internet, then your funds are vulnerable to hackers across the web. At this point, your funds are not considered to be in cold storage. Ultimately, USB drives are cheap and accessible, but not secure.
The recommended method by the community is hardware wallets — and for good reason. Hardware wallets are the best method for storing funds offline because they are more secure and versatile. Many hardware wallets are waterproof, virus-proof, can support multi-signature transactions, and frequently have software updates to stay compliant with software upgrades for different coins.
Generally, these devices are handheld devices which can be ordered online by the manufacturer. The learning curve for anything cryptocurrency related can be steep, so a device created specifically for cryptocurrency storage with clear instruction is often helpful.
Introducing COINiD Wallet
Unlike many other hardware wallets, COINiD’s cold wallet does not require the purchase of any specialized external hardware. All you need is a separate iOS or Android device. When the COINiD Vault is stored on a separate offline device, the wallet communicates with the vault through QR codes or BLE. Hence, the private keys are never exposed to an online environment.
If you want to learn more about this method, check out COINiD and reach out if you have any questions!
Originally published at coinid.org.