In order to ensure your cryptocurrency is not vulnerable to attackers, it needs to be taken offline and held in cold storage. Part 1 of this series will cover paper wallets and Part 2 will cover hardware wallets.
A recent survey of 564 bitcoin owners revealed that on average, most people who are holding the cryptocurrency as a long-term investment do not intend on selling it for fiat currency until it reaches just shy of $200,000.
They may be wise, considering that if you shorted bitcoin at any point in the past, you made a terrible mistake. The USD/BTC ratio is pushing $8,000 at the time of this writing, with the total market cap over $133 billion. Whether you acquired coins years ago or days ago, if you plan on holding for the long-term, you will want to take them offline if you have more than you’re willing to lose. Trusting your cryptocurrency with a third-party comes with all kinds of risks. If you hold them on an exchange, your funds depend upon the exchange remaining solvent. If the exchange goes belly-up or gets hacked, you’re screwed. Coinbase.com at least covers you with insurance up to $250,000, but the fine print states that it only applies if the company gets hacked or an employee steals your account. If you get hacked as an individual, again, you’re screwed. That leaves you with only one option: cold storage.
Needless to say, it’s important to know what you’re doing when transferring your coins into off-line cold storage. One mistake could spell disaster.
Fortunately, I’m here to guide you through the process.
Two methods of cold storage
There are two ways to make sure hackers cannot access your cryptocurrency private keys. The first is a paper wallet, which is just what it sounds like. You simply print out a piece of paper with a public and private key. After sending funds to the public key, they will be held there in cold storage until you’re ready to move or spend them by inserting the private key into a client.
The second and more user-friendly way is what’s known as a hardware wallet. A hardware wallet is a small piece of custom hardware with custom software created for the express purpose of storing cryptocurrency. This method allows for easier transactions of coins and will be preferable for those who intend on moving funds in and out of the wallet on a regular basis.
How to create a paper wallet
A paper wallet is a piece of paper with two vital pieces of information: a public key and a private key. Both keys exist as a 21-character string of random numbers and letters as well as a QR code that can be scanned. The public key is used to put funds into the wallet. The private key is what “unlocks” the balance.
There are several sites that provide services allowing you to create paper wallets for different cryptocurrencies. My personal favorite is https://walletgenerator.net. A simple search for “paper wallet generator <insert coin here>” will turn up a wallet generator for most any cryptocurrency.
Walletgenerator.net has a security checklist on the right-hand side, showing you the steps you need to take in order to safely create your paper wallet. The text turns green when the condition has been met. There are three steps in total.
1) Download the ZIP file of the website from Github. There’s a link on the page to do this. Inside the folder will be a file named “index.html”. Opening this file will create a local version of the wallet generator, meaning it exists on your device and not online.
2) Use a browser that is capable of generating cryptographic keys using window.crypto.getRandomValues. Safari and Firefox work for this, and while I can’t say for sure, I assume that Chrome and Edge do, too.
3) Use a secure operating system. This will be the most cumbersome challenge for most users. The most extreme option is to use a new computer that has never been connected to the Internet booting up from an Ubuntu LiveCD or flash drive. Here’s a quick tutorial on how to install Ubuntu Linux. You can search YouTube for “how to create a paper wallet using Linux” for further detailed instructions.
If you don’t want to install Linux, at least run a malware scan using a program like Avast Antivirus before creating your wallet. If you’re not too paranoid and are looking to protect modest amounts of coin, this should suffice. But if you have a serious fortune to protect, either use Linux or go with a hardware wallet.
The final steps
Once you’ve done the above, disconnect your computer from the Internet – turn off your router and disconnect any Ethernet cables. Now open the index.html file, select your cryptocurrency of choice, follow the instructions to move your cursor and type random characters to create your keys, and voila! You have a paper wallet. When you print it, make sure your printer is also offline. Connect it to your offline computer via USB cable and print away. Keep your paper wallet in a plastic bag or get it laminated and keep it in a safe place.
To make sure your coins arrived at their intended destination, use a blockchain explorer such as blockchain.info. Enter your public key to see what transactions have entered it. I recommend sending a tiny amount of coin first, waiting for confirmations, checking to make sure it arrived and then sending the whole balance you want to store.
If you want to take your coins off the paper wallet (you know, when one BTC equals a cool ten trillion USD), you will need to download a desktop client such as bitcoin-qt or electrum wallet (or the relevant wallet for your crypto of choice, such as litecoin). I recommend electrum, as it simply asks you to enter the private key. You can then use the client to send the coins wherever you like. Of course, your computer must come back online for this.
All in all, creating a paper wallet is not too complicated. The key is to create the wallet offline on a secure machine and keep it in a safe place – for example, a fireproof and waterproof lockbox. Here is a good instructional video if you are more of a visual learner…
Hardware wallets are an even simpler way to put coins into cold storage. In the next post, hardware wallets and their use will be covered in detail.
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