The use of cold storage requires more intermediate steps to transfer funds to another user or an exchange; therefore, online wallets and even exchanges are more popular when it comes to storing crypto savings. Nevertheless, there are ways to spend or sell Bitcoins without taking them out of cold storage, and many companies are actively developing user-friendly and easy-to-use offline wallets and “cold trading” solutions. At the same time, it is impossible to “get everything,” and even if we combine convenience and safety—features that are rarely offered as a bundle—we still have to make trade-offs. In that case, we will be sacrificing the basic and even ideological characteristics of cryptocurrencies.
In the Bitcoin Wikipedia, a “physical Bitcoin” is defined as a type of wallet that works as a bearer instrument, that is, it can change hands and is not assigned to a specific person. Thus, you can pay using them as simply as cash. In fact, this is a cold (hardware) wallet. The physical Bitcoin has a public address and a private key, and the Bitcoins stored in such a “wallet” cannot be spent as long as the private key remains unknown. The security of physical Bitcoin is provided by a tamper-evident seal against unauthorized access. In this case, the online side of cryptocurrency payments is violated, which was outlined as one of the primary features of Bitcoin in its white paper, and the trustless nature of cryptocurrency transactions spelled by Satoshi is also distorted in a certain way.
The first physical Bitcoin was introduced in 2011. It was the Casascius project from developer Mike Caldwell.
Each coin contained a private key to the Bitcoins stored in a particular account. The coins reflected the relative worth of an account, but, like any physical Bitcoin, they were just containers for the digital information that provided access to Bitcoins. The eight-character code on the outside of the coin corresponded to the first eight characters of the Bitcoin address, which was assigned to that very coin.
To spend Casascius, its holder had to enter a private key and get access to the digital record on the blockchain (that is, to the Bitcoin itself). The private key code could be entered directly into Bitcoin clients or crypto exchanges to deposit funds.
Back to the Past
While the progress in cryptocurrencies became possible due to the invention of Reusable PoW (RPoW), which allowed not to create a new digital record every time after the coin was spent, the “physical Bitcoin” in this sense takes a step back.
The private key of the Casascius coin is concealed under the tamper-proof hologram label, and by using it, the user can check the availability of funds in the coin. If the hologram is intact, then the private key was not used, and if it’s peeled off, one will be able to observe an obvious “honeycomb” pattern. This will mean that the private key has already signed the transaction and the Bitcoins stored in the coin have already been sent.
The denomination of coins was 0.5, 1, or 25 Bitcoins, which at the time (2011–2014) was on par with the amount of everyday payments: the price of Bitcoin back then ranged from $0.70 to $10, $30, and $70; then, $130 to $300 (in December 2013, the price briefly exceeded $1,000 but then fell again). Another type of coin was made from troy ounces of gold (~31.1 g) and contained 1,000 Bitcoins.
Casascius also produced gold-plated bars. One of them had two-factor authentication and came out in two forms, either with a value of 100 Bitcoins or empty, for savings (that is, as an ordinary cold wallet). Another option contained 1,000 Bitcoins.
In November 2013, Caldwell suspended the business because FinCEN equated coin printing to money transmission and obliged him to register and obtain the appropriate license.
The latest entry on the project’s blog dates back to December 2014. At the same time, the site that tracks it shows that new coins were produced until 2016, and 21,639 coins and bars are still used (users note, however, that the site is most likely already dead and does not update statistics ). The impact of Casascius on the crypto industry was significant and long, as in October 2017, after the project had been stopped, trader Mike Komaransky wrote on Twitter that he bought his first Casascius coin. “Redeemed my 1st Casascius coin today. Mike Caldwell’s contribution to Bitcoin important—gave a digital currency tangibility, a pretty face,” as Komaransky wrote.
The next notable “physical Bitcoin” was the product launched in 2018, the “smart banknotes” of Tangem. These are Bitcoin and Ether banknotes with a fixed value of 0.01 or 0.05 Bitcoin or Ether. Users can also order a Tangem banknote for any ERC-20 token.
Security and availability checks are different in this case. A “banknote” has a non-recoverable private key that is stored on the chip inside the device (and is also created by this chip, through its own, cryptographically-protected random number generator). It is impossible to “extract” and find out this private key. The co-founder of Tangem, Andrew Pantyukhin, also notes that it is economically unprofitable to hack a separate banknote.
Users can transfer Bitcoins to another wallet or exchange by scanning a banknote through the Tangem application. Users can also check the availability of funds when receiving a banknote as payment by scanning it with a smartphone, and this is ensured by the support of the NFC technology.
The primary role of Tangem and its importance for the industry is to stimulate the mass adoption of cryptocurrencies due to “tangibility” and ease of use: Bitcoin is no longer an abstract digital record, but a real “bill” that can be touched. This was also noted by Yoshitaka Kitao, President and CEO of SBI Holdings, saying that “the Tangem hardware wallet, which is highly secure and affordable, is an important tool to promote mass adoption of digital assets and blockchain.” In January, the company announced it was raising USD 15 million from SBI Crypto Investment Ltd.
“We take the next big step on our mission to bring blockchain to people’s everyday life. In 2018, our technology was proven by the markets after we launched the mass production of Tangem cards for cryptocurrencies and tokens. With this additional investment in 2019, we will be able to extend our product offering in other industries and provide better support to companies which embrace the idea of the physical distribution of blockchain assets,” said Tangem co-founder Andrey Kurennykh. The “other industries” in which Tangem plans to develop include stablecoins, initial coin offerings, ticket sale systems, anti-fraud, digital identity, loyalty, and promotion.
In late January, Tangem announced it would help in creating the Republic of the Marshall Islands’ decentralized cryptocurrency Sovereign (SOV). It will be issued in the form of physical banknotes and will become one of two official methods of settlement (the dollar is the one currently used in the state). “We are excited to bring in Tangem as another reputable and forward-thinking partner on our journey to create the world’s first sovereign digital currency. Tangem will help us ensure all citizens, including those living on more remote outer islands, are able to easily and practically transact using SOV,” said David Paul, the Minister-in-Assistance to the Presidents of the Marshall Islands.
In mid-January, the BitGo cryptocurrency cold storage service provider announced that starting from the end of the month, its customers would be able to buy and sell digital assets so that they would not even have to withdraw coins from offline cold storage.
As a result, the main security threats that are associated with the storage of cryptocurrencies in online wallets or on the exchange disappear. Despite being warned not to keep a significant part of their crypto assets online, many users store Bitcoins with online wallet providers or exchanges because of their ease of use and easy access to funds. As a result, some do not even know their private keys, without actually owning their Bitcoins, and put their funds at risk of a hacker attack. BitGo CEO Mike Belshe notes that the ability to buy or sell a cryptocurrency without placing it on the exchange also eliminates the risk of human error and discrepancies with compliance.
BitGo offers this functionality through a partnership with trading company Genesis Global Trading. Genesis Trading CEO Michael Moro explains that Genesis Trading will connect buy and sell orders from BitGo customers. Belshe promised that a partnership with Genesis would not be the only opportunity for users to trade through cold storage. “We will hook up as many liquidity sources as we can so our clients will have access to as much liquidity while staying in cold storage,” said Belshe.
The Armory cold wallet provides a special kind of communication between cold and hot wallets, also enhancing security. Unlike other offline wallets, Armory does not require synchronization of the blockchain with offline storage and does not need access to any information except Armory software and the wallet file.
Armory allows users to create an offline wallet and its online copy, which will be available in a view-only mode. To send funds from such a wallet, users need to create an unsigned online transaction, sign it offline, and then broadcast it online. As a result, the private key will never be on the online device.
Paper Is Enough
“‘Spending’ doesn’t have to involve signing. If your sole copy of a key is on a piece of paper, you could ‘spend’ it by giving it to someone else. They’d probably want to secure it by signing it to a new address before you regenerate the key using your master key, but in a trust-based transaction, you could call it spending,” as a user wrote on Bitcoin Stack Exchange.
“We define an electronic coin as a chain of digital signatures. Each owner transfers the coin to the next by digitally signing a hash of the previous transaction and the public key of the next owner and adding these to the end of the coin. A payee can verify the signatures to verify the chain of ownership,” writes Satoshi Nakamoto in the Bitcoin white paper, in the “Transactions” section. Thus, it is possible to spend Bitcoins without compromising their security, but almost all such methods sacrifice the basic principles of Bitcoin operation.