Bitcoin Cold Storage: What Is It? (Benefits & Drawbacks)

Cold storage is a popular choice for long-term Bitcoin holders, or "HODLers," who want to make sure that their assets are safe from hackers. 

This guide will break down what cold storage is, how to set up a Bitcoin cold wallet, and which storage methods are best for you. 

What is Bitcoin cold storage? 

Bitcoin cold storage refers to storing Bitcoin offline, so that it can’t be accessed remotely. This reduces the possibility of losing your BTC to a hack. 

What’s the difference between cold wallets and hot wallets? 

Wallets that remain connected to the internet — such as Coinbase Wallet — are called hot wallets. 

Hot wallets are easier to use for sending and trading your BTC. However, they are more vulnerable to cyberattacks.

The benefits of cold storage 

• Long-Term Storage: If you’re planning to hold your BTC for the long-term, cold storage ensures that you can store your assets securely.
• Enhanced Security: By keeping private keys offline, cold storage protects against online hacks, phishing attacks, and malware.
• Control Over Your Assets: Unlike exchange wallets, which can be frozen or subjected to withdrawal limits, self-custody through cold storage gives you full control over your cryptocurrency. 

Cold storage is used by investors, institutions, and even nations. In March 2024, El Salvador took self-custody of a significant portion of its national Bitcoin treasury using cold storage. 

Drawbacks of cold storage 

• Less Convenient: Cold storage can be inconvenient for investors who need to access their Bitcoin frequently. Moving funds requires extra steps and patience.
• Physical Risks: If you're using methods like paper wallets or hardware wallets, losing your wallet may mean losing access to your BTC. 

Bitcoin cold storage methods 

There are several ways to store Bitcoin offline, each with its own pros and cons. Let’s walk through some of the most common methods. 

Hardware Wallets

Hardware wallets like Ledger and Trezor generate your private keys offline. 

Hardware wallets can be as small as a USB thumb drive — meaning they’re easy to store. In addition, hardware wallets can integrate with software wallets, which means that it’s easy to buy, sell, send, and trade your BTC! 

Examples: Ledger, Trezor

Pros:

• High security, with private keys stored offline.
• User-friendly interface, making it easy for most users to set up and manage.

Cons:

• Both Ledger and Trezor have experienced data breaches in recent years, leaking customer information (though private keys remained safe).

Convenience:

• Easy to use, with integrations with hot wallets that simplify sending and receiving Bitcoin.
• Great for those who want a balance between security and usability.

Price:

• Ranges from $70 to $400 depending on the model.
• Minimal ongoing costs, though purchasing a backup device is recommended for added safety.

Paper Wallets

Paper wallet providers give users the option to remove your keys from the digital space — and instead print out a piece of paper with information like your private keys and seed phrases. While paper wallets were a popular early method of storing Bitcoin, it’s lost traction due to lack of convenience. 

Examples: Electrum 

Pros:

• Extremely low cost and simple to generate.
• No digital footprint, making it resistant to online hacks.

Cons:

• Risk of physical damage (e.g., fire, water) or loss.
• To redeem your funds, you’ll need to bring your private keys back online. 

Convenience:

• Easy to create but inconvenient to access your funds. 
• Because you’ll need to manually enter your information each time, paper wallets are not a great choice if you’re looking to make frequent transactions. 

Price:

• Virtually free, apart from the cost of printing and secure storage.
• Consider investing in a fireproof wallet for added security. This can be as cheap as $8.99 on sites like Amazon! 

Air-gapped Devices

An air-gapped device is a dedicated computer or device that never connects to the internet, used solely for generating and storing private keys.

Examples: Used laptop, COLDCARD Mk4, Keystone Pro 

Pros:

• By keeping private keys offline, air-gapped devices offer high security. 
• Ideal for large Bitcoin holdings and long-term storage.

Cons:

• Complex to set up and maintain. 
• Requires secure transfer methods, like using USB drives or QR codes, which can be cumbersome.

Convenience:

• Time-consuming to use and not beginner-friendly.
• Best for those who prioritize security over ease of use.

Price:

• Initial cost ranges from $100 to $1,000, depending on whether you use a repurposed old laptop or a new, dedicated device like a COLDCARD Mk4. 
• Minimal ongoing costs 

Multisig Wallets

Multisignature wallets require multiple wallets to sign off on a single transaction. 

Pros

• Extremely high security, as these wallets reduce the risk of a single point of failure.
• Great for shared custody (e.g., between business partners).

Cons:

• Complex setup, requiring a deeper understanding of Bitcoin security.
• Bad for frequent transactions 

Convenience:

• Better suited for those with significant Bitcoin holdings and a focus on long-term security.

Price:

Setup can cost $300 to $600, especially if using multiple hardware wallets.

Low ongoing costs, but maintaining secure storage for each key is essential.

How to set up a Bitcoin cold wallet

Here’s a step-by-step guide for setting up different types of cold wallets:

Setting Up a Hardware Wallet:

1. Choose a Trusted Brand: Choose a reputable hardware wallet like Ledger or Trezor.
2. Install Wallet Software: Connect your device to your computer, and download the relevant software. 
3. Set Up a PIN Code: Create a strong PIN to secure access to the wallet.
4. Back Up Your Recovery Phrase: Write down the recovery phrase (usually 24 words) on paper and store it in a secure, fireproof location. This phrase is crucial for wallet recovery if the device is lost or damaged.

Creating a Paper Wallet:

1. Use a Trusted Generator: Choose a well-known paper wallet generator like Electrum. 
2. Generate and Print: Print out the wallet and store it in a safe location, such as a fireproof safe or a secure storage box.
3. Physical Protection: Consider laminating the paper wallet to protect it from moisture and storing it in a fireproof wallet. 

Setting up an Air-gapped Device:

1. Set Up an Offline Computer: Use an old laptop or a dedicated air gapped wallet. Make sure that it’s not connected to the Internet. 
2. Install Wallet Software Offline: Download and transfer wallet software like Electrum using a USB drive.

What cold storage is best for Bitcoin?

In this section, we’ll walk through the best cold storage methods based on your individual preferences — security, ease of use, and cost. 

Security Level:

Best for Maximum Security: Air-gapped devices or multisig wallets.

Best for Beginner Security: Hardware wallets like Ledger or Trezor.

Ease of Use:

Best for Convenience: Hardware wallets due to ease of transactions

Best for Tech-Savvy investors: Air-gapped devices and multisig wallets.

Cost:

Low-Cost Option: Paper wallets (minimal investment).

Higher Initial Investment: Air-gapped devices and hardware wallets.

Recommendations:

For Beginners: Hardware wallets like Ledger or Trezor.

For Advanced Users: Air-gapped devices or multisig setups.

For Long-Term HODLers: Air-gapped device stored in a secure location. 

How to redeem Bitcoin from cold storage 

Redeeming Bitcoin from cold storage can be a difficult process, especially if you prioritize security over convenience. Let’s walk through a few methods for redeeming BTC from cold storage (depending on the method you choose). 

Step-by-Step Instructions:

Using a Hardware Wallet:

• Connect the device to your computer.
• Open the wallet software and verify your identity using the PIN.
• Enter the recipient’s wallet address and the amount of crypto you wish to transfer. 

Redeeming from a Paper Wallet:

• Use software like Electrum that supports importing from paper wallets. 
• Look for the option ‘Import private key’. Then scan it via QR code or enter it manually. 
• Enter the recipient’s wallet address and the amount of crypto you wish to transfer. 

Using Air-gapped Devices

• Use Bitcoin wallet software like Electrum on an Internet connected device. Create a Partially Signed Bitcoin Transaction (PSBT). 
• You can transfer the PSBT to your air gapped device through QR code (if it has a camera) or Micro SD card (if it has an SD card slot). 
• Sign off on the PSBT from your air-gapped device. 

Multisig Wallets:

• Enter the recipient’s wallet address and the amount of crypto you wish to transfer. 
• Sign the transaction with each of the wallets’ private keys. 

Best practices for securely moving Bitcoin 

Let’s walk through a few tips to help you securely move your BTC from cold storage.

• Double-check addresses: Always verify the destination wallet address to avoid sending funds to the wrong place. 
• Use test transactions: When you set up a cold wallet, start by sending a small amount of BTC to ensure everything is working as expected.
• Check network fees: Take a look at current Bitcoin network fees so that you can avoid overpaying. 

What happens to my Bitcoin if I pass away? 

Keeping your Bitcoin in cold storage means that your heirs may not be able to access your holdings in the event that you pass away. 

Here are some tips to ensure that you have a plan so that your BTC can be accessed by loved ones: 

• Secure Documentation: Store details of your cold storage setup, including recovery phrases and access instructions, in a secure location. 
• Consider Professional Services: Some law firms specialize in crypto inheritance solutions — so you can make a plan to pass on the custody of your Bitcoin to a friend or family member. 

In conclusion

Cold storage offers a level of security that’s unmatched by online wallets. By choosing the right method, whether it’s a hardware wallet, paper wallet, or air-gapped device, you can protect your assets from potential threats while maintaining control over your holdings.