Cold storage is an offline wallet for personal storage of Bitcoins. The digital wallet is stored on a platform that isn’t connected to the internet thus preventing cyber attacks or any such vulnerabilities. It is considered essential mainly due to its security precautions, especially when dealing with a large quantum of Bitcoins.
The function of the wallet is to store the private keys of a bitcoin owner. Crypto users are normally given a unique string of alphanumeric characters necessary to access their address (Unique ID for the user to execute transactions). Since there are significant threats of these private keys being stolen or misused, cold wallets offer a solution to store them in an offline mode.
Some examples of cold wallets are:
- On a Physical Bitcoin
- USB Drive or other data storage devices
- Written/Printed on a piece of paper
- Embossed on a metal
- Digital storage on a computer
- Paper Wallet (Printed document with a Quick Response code for transactions)
Threats to Cold Wallets
Although the main advantage of having a cold wallet is its security feature, there are multiple instances through which data from cold wallets can be easily compromised. Based on the type of wallet, these are:
Written/Printed on Paper
- It can be physically stolen.
- Paper can be torn, burnt or rot over time.
- Handwritten data can be illegible or easily misinterpreted.
- If printed, the printer has to be trusted since some of them have internet connections or wi-fi which can be hacked.
- If the paper is laminated, it is exposed to degradation over time and cuts/punctures permit moisture to get trapped causing deterioration.
Engraved/Etched/Stamped on Metal Pieces
- The possibility of being stolen if unattended.
- Certain metals can deteriorate(corrode) over time or can cause adverse reactions while coming in contact with other metals.
- Options for fire-resistant metals are few since Tin, Lead and Magnesium are not favorable.
- Corrosion-resistant metals tend to have low melting points, are very expensive and hard to handle.
Digital Storage on Computers
- Computers can crash thereby making data recovery expensive.
- Physical destruction is possible.
- Data can be recovered even after the system is abandoned by the user. Hackers have the ability to trace back information despite multiple overwriting attempts and physical destruction.
- If connected to the internet, attackers can steal the information even with good encryption.
Digital Storage on CD/Floppy Disk/Flash Drive
- Can be physically damaged, burnt or smoke damaged.
- Data can be difficult to recover if the hardware/software for decoding is old or correct formats are not used.
- If the medium is made out of plastic, the possibility of data loss increases due to issues such as:
- Exposure to extreme heat
- Chemical reactions
- Flash drives can corrode due to certain atmospheric conditions.
- Fake drives pretend to store the data but it may not happen at all in the back-end.
Pre-funded Physical Bitcoin
- Since a manufacturer generates and installs the key, chances of stealing and copying are very high.
- The object can be tampered with while making the delivery.
- The operational security of the manufacturer could be unknown since they could be generating keys on regular computers
- Since the medium to store the key is generally paper/plastic, it can be easily damaged or misplaced.
Steps to Solve these Issues:
Certain preventive steps are required to be taken for overtaking issues of cold wallets. Some of these are:
- Utilizing any type of multi-signature method and storing them in various locations where permanent and secure access is available.
- If keys are engraved/embossed/stamped on a metal sheet it should be hidden from the common eye like:
- Storing it in a secured bank locker;
- Hiding it in a drywall;
- Wrapping it using a duct tape.
- Etch the words on a glass and store it carefully.
- Metal sheets can be coated with a protective oxide layer through which the content will not be corroded easily.
- If possible, store the information in different locations such that if any catastrophic event occurs, back-up is always available.
So are Cold Wallets really Safe?
Cold wallets resolve the problem of storing large bitcoins and also prevent network-based thefts to a great extent. However, human negligence and error can lead to an easy compromise of cold wallets. Thus, a large amount of trust and care is required while storing data through such modes while ensuring careful maintenance on a continuous basis.
Do you believe cold wallets are safe? Or, has this article changed your mind? Let us know in the comments below:
Financial Analyst for JP Morgan Chase | Content Writer for eduCBA | Mentor