Cold Storage

Key Takeaways

  1. Many exchanges continue to store bitcoin in hot wallets (wallets that remain connected to the internet). 
  2. Buying bitcoin from providers that keep 100% of their coins in cold storage is the most secure way to store your investment. NYDIG has made cold storage extremely simple for our users. 
  3. For those who want the safety of cold storage and are comfortable with the increased personal responsibility, self-custody and multi-signature services are options, but each comes with trade-offs.

Cold Storage 

In its more than thirteen-year history, no one has ever hacked the Bitcoin network. 

Consider the following for a sense of just how impenetrable the 256-bit encryption is that underpins the network. The odds of guessing a specific private key -- that is, the password for an account on a distributed public ledger known as the blockchain -- is about the same as winning the Powerball lottery nine times in a row. 

But to tap into the complete security of the Bitcoin network, you must hold your private keys in cold storage. 

So what is cold storage? Simply put, it means storing passwords on devices that never touch the internet. In the early days of Bitcoin, people used pen and paper to safeguard their private keys. But while storage techniques have progressed since then, many bitcoin owners continue to leave their keys on exchanges in what are known as "hot" wallets (wallets that are connected to the internet). 

Exchanges have undoubtedly bolstered their security since the notorious Mt. Gox hack in 2014. Still, storing bitcoin in an exchange's hot wallet goes against best security practices. 

For the most secure bitcoin experience, opt for cold storage. However, moving bitcoin keys offline can seem like a daunting task. Thankfully, there are ways for everyone to capitalize on the benefits. 

Cold Storage Options 

The easiest way is to research the storage methods of your exchange or provider. Some, such as banks that partner with NYDIG, keep all client keys in cold storage. 

Here’s how it works. When you buy from a bank backed by NYDIG’s platform, NYDIG credits bitcoin held in its offline storage to your account. As a result, a potential thief can’t gain direct access to your coins even if they can obtain your account information. However, suppose a thief did steal your account data. In that case, they still wouldn’t be able to move bitcoin out of NYDIG’s platform quickly. Doing so would still require undergoing an identity check. 

This cold storage solution is best for those who want to own bitcoin but don’t want the personal responsibility of holding their keys. 

For those that want to hold their bitcoin -- say because they value the self-custody property of the protocol -- there are hardware wallets. While this option grants greater flexibility and removes intermediaries, it comes at the cost of much greater personal responsibility. Self-custody means there’s no one to call if you lose your private key. That’s a trade-off many people may not be comfortable making, and for a good reason. Bitcoin’s history is replete with stories of fortunes lost because of simple mistakes. In one infamous case, a software engineer in the United Kingdom threw away a hard drive that held the private key for an account now worth hundreds of millions of dollars. 

A multi-signature setup is the third way of putting bitcoin keys in cold storage. The bitcoin owner, a service provider, and a trusted third party each hold what amounts to a fraction of a key. Each holder keeps their part of the key offline. In a typical two out of three configuration, a transaction requires two keys. What you get is redundancy while still maintaining direct access to your bitcoin. If a private key is lost, the bitcoin remains accessible through the other two accounts. The trade-offs for choosing to go with a multi-signature setup are less freedom than if you held the keys on your own and the fees charged by the service provider.


This report has been prepared solely for informational purposes and does not represent investment advice or provide an opinion regarding the fairness of any transaction to any and all parties nor does it constitute an offer, solicitation or a recommendation to buy or sell any particular security or instrument or to adopt any investment strategy. This report does not represent valuation judgments with respect to any financial instrument, issuer, security or sector that may be described or referenced herein and does not represent a formal or official view of New York Digital Investment Group or its affiliates (collectively, “NYDIG”). 

It should not be assumed that NYDIG will make investment recommendations in the future that are consistent with the views expressed herein, or use any or all of the techniques or methods of analysis described herein in managing client accounts. NYDIG may have positions (long or short) or engage in securities transactions that are not consistent with the information and views expressed in this report. 

The information provided herein is valid only for the purpose stated herein and as of the date hereof (or such other date as may be indicated herein) and no undertaking has been made to update the information, which may be superseded by subsequent market events or for other reasons. 

Information furnished by others, upon which all or portions of this report are based, are from sources believed to be reliable. However, NYDIG makes no representation as to the accuracy, adequacy or completeness of such information and has accepted the information without further verification. No warranty is given as to the accuracy, adequacy or completeness of such information. No responsibility is taken for changes in market conditions or laws or regulations and no obligation is assumed to revise this report to reflect changes, events or conditions that occur subsequent to the date hereof. 

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