Cold storage in the context of Bitcoin refers to keeping a reserve of Bitcoins offline.
For example, a Bitcoin exchange typically offers an instant withdrawal feature, and might be a steward over hundreds of thousands of Bitcoins. To minimize the possibility that an intruder could steal the entire reserve in a security breach, the operator of the website follows a best practice by keeping the majority of the reserve in cold storage, or in other words, not present on the web server or any other computer. The only amount kept on the server is the amount needed to cover anticipated withdrawals.
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.