Cryptocurrencies are an ecosystem built entirely on a digital platform. Depending on a user’s digital savviness, they may be vulnerable to hackers who seek loopholes to access and manipulate the system leading to loss of funds. Therefore, digital currencies employ various measures to ensure the safety of users’ digital assets. These systems make use of decentralized ledgers and employ various transaction verification mechanisms such as:
These mechanisms prevent hackers from stealing funds by altering entries in the blockchain, interfering with transactions, etc.
However, this risk of attack is not only a problem of ledger entries and interference with transactions. Hackers may also steal cryptocurrencies directly from the user’s digital wallet. Thus, to mitigate this, once a user opens a digital wallet, they receive a private key, limiting access to the wallet only to them.
Hacks occur through connectivity. For example, the internet is a tool that connects devices around the world through internet access. Therefore, the owners of digital wallets where they store their crypto assets should store their private keys offline; this way they limit the likelihood of losing their private keys and consequently their money to hackers. More tools will be soon available to expand the usability of blockchain technology and digital currency off the internet for a more secure transaction ecosystem.
Hardware wallets are a development in the cryptocurrency market; they allow users to store their private keys in a secure area of a microcontroller; such that their transfer from the device is impossible. They are immune to viruses that hackers often use as a means to steal from software, interactive and allow users to validate transactions offline. Some popular hardware wallets currently available in the market include the digital Bitbox, Ledger, Trezor and Coolwallet among others.
However, there is a number of software wallets that have both online and offline functionality; these allow for the storage of private keys, the digital currency and the offline verification of transactions (cold storage); the online mode is only used to initiate and broadcast transactions to the network.
Electrum is one of the most popular Bitcoin wallets, available since 2011. It allows for users to initiate and approve transactions offline. It is light, user-friendly and feature-rich while maintaining a high level of safety. For additional safety, it is compatible with both trezor and ledger hardware wallets which are inherently more secure for storage purposes.
How to Trade Bitcoin Offline Using Electrum
Follow this link to download Electrum. Choose the version suitable for your device. The wallet is currently available on Mac, Linux, and Windows.
Save the setup to an external storage device and take it to your offline computer and install.
Create a new standard wallet and click “next.”
Select “create a new seed” then click “next.”
Store the seed safely and click “next.”
Enter the seed and click “next.”
Create a secure password to protect the wallet. Click “next.”
The wallet will create new addresses where Bitcoins purchased will be transferred to. The setup is complete. If you want to initiate a transaction:
Go to “Addresses”
From the drop-down menu with a list of addresses, select the address you wish to send the Bitcoins, right click and select “Copy Address.” You can select more than one address.
Getting your Public keys
Initiating a transaction offline involves the creation of a watch-only address online. Once in your electrum wallet on your offline device:
Click on “wallet.’’
Click on “master public keys”
Copy the master public key. This is what allows you to create the watch-only address
Store the public keys on a text file and save it in an external storage device
Creating a Watch-only Address
Install electrum on the online computer following the steps in “Installing electrum”:
From the electrum wallet on the online computer, click “file.”
Select “new/restore wallet.”
Name the wallet and click “OK.”
Select standard wallet”. Click “ok.”
Select “use public or private keys” and click “ok.”
Get the public keys from the external storage device, paste it and click “ok.”
A watch-only wallet will be created. The watch-only wallet allows you to view your transaction history and create a new transaction; however, you cannot broadcast the transactions to the network.
Creating a Transaction
While still on electrum on the online computer, click “send.’’
Enter the address to which the Bitcoins are to be sent, the amount to be sent and then click “preview.”
Click “save” and store the transaction on the external storage device
At this point, the transaction has been created but is not signed yet. You will need to return to the electrum wallet on the offline computer to sign it.
Signing the Transaction
On the offline computer, open the electrum wallet and select “tools.”
Click “load transaction.”
Select “from file.”
Insert the external drive and load the unsigned transaction from it
Click on “sign” to sign the transaction with your private key
Enter your password and click “ok.” You have now signed the transaction
Click “save” to save the newly signed transaction
Once more, save the newly signed transaction on an external storage device
The main purpose for limiting signing to the offline device is to keep the private keys (which give complete access and the ability to move money from the wallet) away from connected devices which would be more vulnerable to hacks. However, the record of the transaction has not entered the blockchain. This requires us to return to the online computer.
Broadcasting the Signed Transaction
On the electrum wallet on the online computer, select “tools.”
Click “load transaction.”
Select “from file.”
Insert the external drive and load the signed transaction from it
Click on “broadcast” to finalize the transaction.
There are many more software wallets, designed for the desktop, mobile devices or online that can be used for storing digital coins. They include Copay, Exodus, and Jaxx. Hardware wallets have mostly been used for their secure storage of private keys and currency. Transactions have however been limited to software wallets until recently when the startup exchange platform Radar Relay included support for the ledger hardware wallet allowing for the transfer of ether and other ERC-20 tokens directly from one ledger wallet to another, a significant development for the industry.