A common adage among Bitcoin enthusiasts is that you shouldn’t store more bitcoins in your wallet than you are willing to use. This is used as a warning to avoid over-investing in Bitcoin as well as a way to communicate the message not to store an entire fortune in a single wallet. Coinbase, a leading online wallet provider, wants to make storage simpler.
Why is another option needed?
The default state of Bitcoin is to be within a “wallet.” A given sum of bitcoins will be associated with an address, of which any user of Bitcoin can have an unlimited amount of. Much like real wallets, you want to keep some bitcoins in an everyday use wallet for easy access.
Just like your real wallet, though, you probably don’t want your entire savings in that wallet. You could become a target for theft if anyone knew and the consequences of losing your wallet are too dear. Instead, many people trust a bank for larger amounts of money.
Coinbase Vault offers a similar option for Bitcoin owners. Unlike fiat currency (like USD), bitcoins can be irrevocably stolen by a computer hacking attack. Likewise, the public ledger system that keeps Bitcoin fraud from occurring makes a given wallet address’s balance public knowledge.
So if I posted an address for donations on GeekSided and I had 5 BTC (worth around $3000 USD at the time of publishing) in that address (verifiable by checking the block chain), I’ve provided sufficient public information to become a target for thieves online. While 5 BTC may not attract the most sophisticated thieves, you get the idea; people will see if I have made obvious security mistakes.
For this reason, a practice called “cold storage” has become common among people protecting larger amounts of Bitcoin. This means that the wallet is accessed via software only on a computer or other device that has no Internet connection and never has connected to the Internet. This provides absolute assurance that there are no keyloggers, man-in-the-middle attackers, or anything else jeopardizing the security of the wallet.
Coinbase Vault tries to bridge the gap between novices and Bitcoin security
Coinbase Vault is trying to offer this service without requiring customers to have the expertise required to set up cold storage on their own. By default, any Bitcoin currency exchange service like Coinbase needs to do this with their own bitcoins to avoid theft. For instance, it is believed an enormous heist may be responsible for the collapse of Mt. Gox, the one-time largest Bitcoin exchange.
Vault provides several features to try to prevent fraud as well as prevent attacks on Coinbase.
- Two-factor authentication by default, with additional factors allowed.
- 48-hour delay before withdrawals are processed.
- Like Coinbase’s own holdings, 97% are stored in cold storage in various geographic locations.
- Accounts can be held jointly, requiring the approval of multiple people before withdrawals are processed.
For now, at least, this service is free. While this isn’t as secure as a savvy person setting up their own storage – the fact that it is set up online means there is a vulnerability upfront as the account is created – it appears to be a solid option for those without the acumen or desire to take these measures on their own.
It reflects a further maturing Bitcoin market, as financial services like Coinbase offer comparable services to what is available for fiat currency.