The lake was created during the 1980 eruption of Mount St. Helens, which blocked its natural outlet, Coldwater Creek, with volcanic debris.

Mount Whittier, the highest point in the basin at 5,883-foot (1,793 m), sits at the head of the Coldwater Creek valley.

[5][6] The eruption of Mount St. Helens on May 18, 1980, created a lahar or debris avalanche that rushed down the North Fork of the Toutle River, burying the whole valley up to 600 feet (180 m) deep.

Because the material forming the dam consisted of soft volcanic debris and ash, it would erode quickly if overtopped, causing serious flooding downstream.

[7][8] In early 1981, the U.S. Army Corps of Engineers excavated a spillway and outlet channel for the lake, stabilizing it at 2,503 feet (763 m) above sea level with a volume of 67,300 acre-feet (83,000,000 m3).

The landslide dam forming Coldwater Lake was closely monitored until 1998, when its stability was no longer deemed a serious concern.

[8] The lake has since been shrinking slowly due to erosion of the approximately 17-square-mile (44 km2) watershed, which was largely stripped of vegetation during the 1980 eruption.

Washington State Route 504 (the Spirit Lake Highway) provides access from Interstate 5 at Castle Rock.