A neutral and to the point Guardian article today discussed how someone who goes by the pseudonym TradeFortress lost $1 million of users money on his developed site Inputs.io. At the end of the article, the Guardian points out how TradeFortress recommends everyone store bitcoins offline, even if they developed the code of an online wallet. But The Guardian writer points out that, ”Bitcoin users face a trade-off between security and convenience. Storing the coins offline, as TradeFortress now recommends, is technologically more complex – and also makes it harder to spend them in the real world.”
Yes, when your Bitcoin are offline, they are harder to spend.
But, this sentence by Guardian is an oversimplification of the factors in question. Namely, while it may take more steps to store bitcoins offline, it is a stretch to assert that it is “technologically more complex.” For a millennial, but not to be forgotten the many baby boomers who’ve adapted to computer culture, the further steps are straightforward, and, most importantly, pay-off.
In order to start an online wallet, the current Bitcoin user must open an online wallet. This is a familiar process to anyone who has ever opened any sort of non-financial account online. A username, password, an e-mail maybe. For more a layer of technological difficulty, many websites now offer 2-FA authorization, which entails a second device, such as a cell phone, to which an additional password is set. These passwords are randomly generated with each logon attempt.
In order to have an offline wallet, one need only download an application, like Bitcoin-QT. One can do this with numerous small devices, like a Raspberry Pi or an additional laptop. You can upload the program itself from a device with QT on it already, or you can connect this device to the internet, download QT, create wallet addresses, and then begin receiving payments to this address while it is offline. In order to send funds, you will then have to get the .dat file from the wallet, and connect to the world wide web. This can be done a couple of ways to ensure protection.
Methods of cold storage include keeping bitcoins:
- On a USB drive or other data storage medium in a safe place (e.g. safety deposit box, safe)
- On a paper wallet
- On a bearer item such as a physical bitcoin.
- Online, but on encrypted media where the encryption key is offline.
Then there is deep cold storage, in which a USB stick containing an encrypted wallet is put in a vault or something like that. The public (sending) addresses can be used any time to send additional bitcoins to the wallet, but spending the bitcoins would require physical access to the box (in addition to knowledge of the encryption password).
In order to spend bitcoins in the real world? This is quite simple. Just like you wouldn’t hold $50,000 in cash on you, DON’T HOLD $50,000 in BTC on you!
Hold what you need, so when you run into the one of the many bitcoin accepting businesses, you can spend your coin.
As for where you cold store your Bitcoin wallet, that’s another question. I have written about Armory, and we have an interview with Alan Reiner currently being edited. Gold and silver investors will sympathize that, like the typewriter of the twentieth century, storing your gold, silver and bit coin will be tricky.
Justin O’Connell is the author of Bitcoinomics.