The only sure way of keeping your Bitcoin safe from the many dangers of the internet world, some of which may not even be apparent to you, is keeping your Bitcoin wallet private keys away from the internet in cold storage.
It is not child’s play to successfully set up a cold storage Bitcoin wallet, though. If anything, it is as byzantine as Bitcoin itself.
This succinct yet comprehensive step-by-step guide on how to set up a cold storage for your Bitcoin wallet private keys will be useful for the more security-oriented Bitcoin users out there.
Create an offline Bitcoin address using the paper wallet method
Cold storage is essentially a term used to describe the practice of storing your Bitcoin wallet private keys in a place where they can’t be accessed through the internet until you are ready to spend them.
There are several methods of cold storage, such as a hardware wallet, but in this guide we will focus on using a paper wallet.
In case you’re wondering what this method owes the “paper” part of its name to, it is basically because your private keys are going to be on a piece of paper at the end of the process.
Firstly, you are going to have to connect your computer to the internet so that you can access the Paper Wallet Tool on the Bitcoin.com.
Follow the application’s instructions, and proceed to the next step.
Once you have generated your keys, save the resulting paper wallet page locally on your computer by saving the web page.
You are now done with the internet, and are free to close the browser and disconnect your computer from the internet if you would like.
Connect your computer to a printer and click print your information.
The printout should contain the private and public keys with their corresponding QR codes.
Store it in a safe place such as a safe, or the same place you could consider storing physical money of the same worth.
Remember, it has both the private and public keys, which can be used by anyone who accesses both to make payments without further authorization from you.
It would be advisable to delete the soft copy file on your computer if it has other users or just so that you can have a single copy to worry about.
Alternatively, users can print their paper wallet directly from their web browser.
How the public and private key-pair works
To understand how the Bitcoin wallet keys work, imagine you want to pay John Doe 20 BTC.
To make this payment, you are required by Bitcoin to make a promise that you will transfer to Simon the agreed amount.
This promise is called a transaction.
Had it been simply like this, it would be easy for John Doe or someone else to steal from you by forging transactions from your address.
Bitcoin uses unforgeable digital signatures to prevent this kind of theft from taking place.
Your Bitcoin wallet software adds a signature by processing the transaction accompanied with the private key to your address.
Any attempts to change the transaction would change the digital signature as well.
The authenticity of your signature can be verified through a math-based technique by anyone using the Bitcoin network.
By digitally signing the transaction, you prove knowledge of your private key and authorize transfer of Bitcoin to Simon’s address.
Load your cold storage Bitcoin wallet
To add funds to your cold storage Bitcoin wallet, you only need to copy the address or scan the public QR code and transfer funds to the cold storage.
Transfer funds from your cold storage
Since your cold storage Bitcoin wallet was created offline, you will be required to first transfer the funds from the cold storage to an online wallet before transacting.
By transferring these funds—most likely to an online exchange wallet—you have created a traceable transaction. Depending on where you live, this means you will be required to report this on your taxes when you file them. Not to worry though, this has become significantly easier over the years.
You can import to basically any Bitcoin wallet that supports importing private keys.
A good example of a suitable Bitcoin wallet is Bitcoin Unlimited, which is Bitcoin-run, or Blockchain.info, one of the most popular independent clients.
Once the funds are in your Bitcoin wallet, they can then be used in transactions without further processing.