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What is Cold Storage, and How Does it Work?

Author: J.P. Moneybags

Fri Aug 21 2020

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BLOCKCHAIN - A few months ago, I wrote about wallets.  I got thinking about this again recently because I've been doing a lot more holding than trading.  Just gathering stuff up, really.  I have a couple of sites that I frequent where I gather enough to offload, and it's nice to have a place to offload to.  Someplace that will not charge fees.  There isn't much point in keeping stuff on an exchange or a faucet site, or even a multi-wallet site like CoinBase if you have no intention of actually spending or trading it.  And this is the point of the cold storage.

The term is pretty much what it implies.  It's just storage.  And it is inert.  It cannot be used for anything other than holding more.  The only way to use what is in cold storage is to "sweep" it to a live wallet.  Which I will explain later.  In short, you can create a wallet, and no one else in the world will even be aware of it until you deposit money into it.  Actually, unless someone knows the address, they still won't know about it.  And unless they have the secret key to unlock it, all they can do is read the contents of it.

Here...  I'll show you what I mean.  Here is a link for a blockchain explorer to show the activity on one of my cold storage wallets.  I created that wallet with a "paper wallet" generator, and have just been depositing LTC into it for a year or so.  The paper wallet is really what I'm talking about here.  It's not on any exchange.  It only exists as a record on the blockchain.  The strangest thing about this, to me anyway, is that the wallet is created by simply generating a string that matches the specifications of that wallet type as per the blockchain.  There is no predetermined parking spot for the wallet to exist.  It is simply an identifier for transactions.

The site is WalletGenerator.net. You really don't need to go to the site more than once. You go there and download the entire open-source project, and run it from your local machine. Why do you do this? Because you do not want to be connected to the internet when you run it. You download the site, unzip it into an empty folder, and run the index.html file in your favorite browser. Turn off your Wi-Fi first so you are offline.  The reason they call it a "paper wallet" is because you can print out the QR code, and there you have it.  The QR code just makes things easier.  All that is is a scannable representation of the alpha-numeric string that is the wallet.

What does it mean to "sweep" a wallet?
I said I would get back to this.  This is an important thing to know.  If you don't know how to get your money out of the paper wallet, then it is literally nothing more than a hole in the ground in which you throw money.  You need to have a way to access it, right?  The process of moving the coins from the paper wallet to a wallet that is on an exchange, is called sweeping.  You provide the wallet address and the secret key associated with it, and those two things together allow you to unlock the wallet and send its contents elsewhere.  The secret key is the single most important part of this.  If you lose that key, you will never be able to unlock the wallet.  Or, if someone else finds the key, they can break in and steal what is in the wallet.

Remember also, that every transaction done on the blockchain costs a fee to someone.  Even sweeping a wallet will cost you.  For more information on what to expect there, read this other story about cashing out.  It gives a bit more detail.

It should be noted that sweeping a wallet does not destroy it.  You can always use it again.  However, it's probably not the best idea since you have now exposed the secret key.  So if you decide to put money back into the wallet, there is a greater chance of someone using that key and stealing your stuff.


#bitcoin #cryptocurrency #cryptowallet #wallet #coldstorage

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