What is a Paper Wallet?

A paper wallet is an offline mechanism for storing bitcoins. Unlike fiat currency, there is no physical representation of a bitcoin or most other cryptocurrencies. Rather, "wallets" which are used to store digital tokens are usually software programs that help to facilitate updates to the blockchain ledger when transactions are made. Paper wallets are different from so-called "hot wallets" because they operate separately from the Internet. However, they still do not store physical bitcoins; the "paper" quality of these wallets refers primarily to the method of access for the cryptocurrency owner.

Paper wallets were primarily popular in the early years of bitcoin. In recent years, cryptocurrency users have tended to explore other methods of securing their holdings.

Key Takeaways

  • A paper wallet is a printed piece of paper which contains keys and QR codes that are used to facilitate cryptocurrency transactions.
  • Because they are removed from the Internet, paper wallets were long thought to be more secure than other forms of cryptocurrency storage.
  • Many investors believe that risks associated with losing, misreading or damaging the paper wallet may outweigh the potential security benefits.

Understanding a Paper Wallet

Like a hot wallet, a paper wallet also makes use of public and private keys. Cryptocurrency users wishing to store their holdings in a paper wallet typically involves printing the private key onto a piece of paper. To set up a paper wallet, visit a wallet generator site which will create keys and corresponding QR codes at random. It's generally advised that users unplug their Internet access while the keys are being generated, and that users wipe their Internet history after the keys have been created. Ideally, they'll be generated on a brand-new computer to completely avoid any malware interference. Of course, this won't be feasible for most users, but everyone should at the very least run a malware check on their computer before generating the keys. Print out the codes, being sure to keep track of the paper and not let it become damaged or lost. The codes can be scanned to access additional information about the wallets, but a user must have a "live wallet" (one connected to the Internet) in order to facilitate transactions. The live wallet can be used to "sweep" the paper wallet, effectively transferring coins from the paper wallet to the live wallet.

Benefits of a Paper Wallet

Physical wallets were long considered one of the safest ways to store bitcoins. If properly constructed, and provided that certain precautions are taken, it will be nearly impossible for a hostile user to access your bitcoin holdings. A paper wallet is considered an extremely secure 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.

This form of 'cold storage' confers enormous security advantages. The user is more or less invulnerable from cyberattacks and malware because it is simply not possible to access a user's private key via those avenues. Of course, the safety of these physical documents cannot be entirely guaranteed either - if a would-be hacker discovers the location of your paper wallet and physically steals it, they can access your Bitcoin holdings. Some users hide or disguise the paper wallet. The paper wallet should also be protected from physical damage - if the keys fade and can no longer be scanned, the user will never again be able to access the Bitcoins sent to that address. Even using the incorrect type of printer (non-laser printers can allow the ink to run, for example) may damage the paper wallet.

Risks of Paper Wallets

While paper wallets offer security advantages, they also come with risks, some of them severe. Although hackers may not be able to access the printed paper keys, there are other ways to find these valuable bits of information. Printers that are connected to larger networks often store information, and malware can be surreptitiously installed to steal the keys during the generation process.

For many users, the bigger risk with a paper wallet comes down to user error. If a printer uses inexpensive ink, it may run, bleed or fade with time, rendering the wallet inaccessible. If the paper is lost, stolen, ripped or otherwise damaged, the same concerns apply. If a user misreads a key or if the wallet software no longer recognizes the private key format of the printed wallet, these also bring about problems.

More recently, investors have pointed to the use of raw private keys in paper wallets as a security and user error risk. Unencrypted private keys can easily be exposed to other users, or can accidentally be used to send bitcoins instead of receive them, particularly if users are unfamiliar with the key system.