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"Instead of a Hot Wallet, another way to secure Bitcoins is cold storage. It involves storing Bitcoins offline--meaning, away from any internet access. Keeping Bitcoins offline substantially reduces the threat from hackers. The method of cold storage is less convenient than encrypting or taking a backup; thus it is usually done by keeping some money in the system for regular spending and putting the rest in a cold storage device. This reduces the effort of digging out coins from the cold storage every now and then for everyday use.
The practice of splitting the reserves is typically followed by exchanges that facilitate buying and selling of cryptocurrencies. These platforms deal with huge number of Bitcoins (and like currencies) and are the targets for hackers. To minimize the amount of loss in cases where security is breached, such platforms opt to keep majority share in cold storage. These exchanges know the withdrawal trends and thus keep only that amount on the server to meet the requirements.
The commonly used methods of cold storage are:
- Paper Wallet is a way to safeguard against hackers or computer malfunction and involves printing the public and private keys on paper. In addition, a paper wallet usually has a QR code which can be scanned and added to a software wallet to make quick transactions. Since the paper contains all relevant information needed for spending the coins, its safety is important. It’s usually a good idea to encrypt as well as duplicate the paper wallet for more safety
- Storage devices like a USB drive are also used to keep the secret keys. Such devices are further kept in a safe or deposit box to make sure that they don’t fall into the wrong hands.
- Sound Wallets are another way to secure the virtual currency; the sound wallet technology involves keeping the private keys in encrypted sound files in products such as Compact Discs (CD’s) and vinyl disks. The code hidden in these audio files can be deciphered using a spectroscope app or high-resolution spectroscope.
- Hardware wallets are becoming a preferred choice to secure a wallet in an offline mode. These are small devices which are water and virus proof and even support multi signature transactions. They are convenient for sending and receiving virtual currency, have a micro storage device backup and QR code scan camera. Pi-Wallet and BitSafe are examples of such hardware devices.
In addition to these cold storages, the concept of a deep cold storage service is also catching up. It was introduced by a London based company which offered the security of a bank vault for securing the keys of Bitcoins. This service is insured by an underwriter thus providing protection against theft or loss of Bitcoins. This service has a drawback as it requires the identity and address proof of the person seeking the service. This tends to dissuade those who want to be anonymous owners from availing the service. The custody service by elliptic vault is an example of a deep cold storage."