DEFINITION of 'Paper Wallet'
A paper wallet is an offline mechanism for storing Bitcoins. The process involves printing the private keys and Bitcoin addresses onto paper. Physical wallets, also known as "physical Bitcoins," are considered one of the safest ways to store Bitcoins provided certain security precautions are followed. Images of physical Bitcoins are commonly seen in media coverage in innovative styles, mostly with a ‘new look’ of the coin and the private key printed either on paper, plastic, or metal.
BREAKING DOWN 'Paper Wallet'
A paper wallet is considered a safe way to keep Bitcoins safe from cyber-attacks, malware, etc. A paper wallet involves "printing" and storing Bitcoins in an offline mode. But it's important to remember that, it’s not the Bitcoins that are being printed out like regular currency. It's the information stored in a Bitcoin wallet or digital wallet that gets printed out. The data appearing on the wallet includes the public key (wallet address), which allows people to transfer money into that wallet, and the private key, which gives access to fund spending. Thus, Bitcoins themselves are not stored offline, but the important keys are stored offline.
The main advantages of the paper wallet include: safety from malware and key loggers; not having to bank upon the security of any website; and protection of private keys by 100% ownership. The flipside, however, is that the safety of the physical document can't be guaranteed either. All information required to spend the Bitcoins is there on a paper and thus should be kept very secure. If a paper wallet is lost, there will be no way to access the Bitcoins sent to that address.
Some of the popular tools for producing paper wallets are BitcoinAddressUtility, BitAddress.org, BitcoinpaperWallet.com, OfflineAddress.com, and SafePaperWallet.com. There are some companies that even offer "cold storage" services, i.e. keeping the private key in printed form in a physical location like a safe vault. Such companies are not regulated by the financial services industry, but they are insured against theft.