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Cold storage is an offline Bitcoin wallet where the digital wallet is protected from vulnerabilities such as cyber hacks and unauthorised access. In general, cryptocurrency experts recommend moving Bitcoin to a hardware wallet after the user accumulates an amount they cannot afford to lose to online attacks. Reputable exchanges such as Paychain.ca are willing to hold a certain amount of bitcoins on their platform but it’s up to the user to move it or keep it there.
How a Bitcoin Transaction Works
The wallet stores the bitcoin owner’s private keys which are a unique string of alphanumeric characters used for accessing the address of the user. The address is the unique ID of the user required for making transactions and getting bitcoins from a sender. To complete the transaction, the seller and buyer will share their addresses with each other. The buyer sends the required number of bitcoins to the address of the seller as payment and this transaction is verified by the blockchain, confirming both parties have funds to send. After the payment has been delivered to the address, the seller can access the funds through their private key. This key must be kept secure as when stolen, the bitcoins of the user will be accessed without authorisation.
How to Protect Private Keys from Theft
Storing private keys on a wallet connected to the internet are vulnerable to network-based theft. With these wallets, the functions required for completing a transaction are made from one online device. These wallets generate and store private keys. Transactions are signed digitally using private keys and the wallets will broadcast them to the network. But, such broadcast will make the transaction known to hackers.
Bitcoin investors who want to avoid this security issue can opt for cold storage. This Bitcoin storage option works by signing the transaction with the private keys in an offline environment. Online transactions are moved to an offline wallet kept on a device like USB, hard drive, CB, offline computer, or paper. Thus, even if hackers come across the transactions, they won’t have access to the private key used for them.
There are different forms of cold storage such as paper wallet, hardware wallet, and offline software wallet. With a paper wallet, Bitcoin transactions are made by scanning and signing the document through a QR code. A hardware wallet makes use of an offline device or smartcard for generating private keys offline. Finally, tan offline software wallet splits a wallet into an offline wallet that has the private keys and an online wallet that stores the public keys.
