A paper wallet is just what it sounds like – a crypto wallet made from a piece of paper. It contains a private and public key pair for making crypto transactions. Typically, a key generator program creates the key and prints it on paper in the form of two QR codes and two strings of alphanumeric characters.
A paper wallet is among the oldest kinds of noncustodial, cold crypto wallets, but it is an outdated method that has security flaws.
History of Paper Wallets
In the early days of Bitcoin, paper wallets may have been the most secure form of Bitcoin storage. There was no other mechanism to take coins offline and put them into cold crypto storage.
Still, investors realized that having a safe method of holding onto their crypto was a necessity for crypto investing. Over time, as crypto exchanges, institutional-grade custody solutions, hardware wallets, multi-signature wallets, and other secure forms of storing crypto became more commonplace, crypto paper wallets became less popular.
How Does a Paper Wallet Work?
When created correctly, a paper wallet is immune to hacking. There’s no way to access a piece of paper via the Internet. But certain parts of the process could still make users vulnerable.
The problem is that users have to be very careful when creating paper wallets. The process requires using a computer, and there could be traces of evidence left behind that a sophisticated attacker might be able to access.
How to Keep a Paper Wallet Secure
There are several steps that investors can take to protect their paper wallet. For starters, create the wallet entirely offline, but following these steps:
• Download the wallet generator software to a USB drive
• Plug the USB drive into a new device that has never been connected to the internet
• Create the wallet keys and print them out using a wired connection to a printer
What about when you want to take funds off of a paper wallet and spend them? Things can get a little tricky here, and users who don’t know exactly what they’re doing could lose most or all of their funds.
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Taking coins out of a cryptocurrency paper wallet requires either sweeping or importing the private keys into a software wallet. Sweeping keys and importing keys don’t result in the same outcome, however.
Users who import their crypto private keys, essentially creating a copy of them, could lose funds if they fail to first set up something called a “change output.”
A change output, or change address, is the destination where the remaining funds on a paper wallet will go when a user only spends a portion of the wallet’s balance. If this address hasn’t been set up beforehand, the unspent portion of a paper wallet will disappear forever after the first transaction from that wallet.
For example, if a user has 0.1 BTC on a paper wallet and decides to spend just 0.01 BTC, the remaining 0.09 BTC would automatically go to a change address. If no change address has been established before the transaction, the Bitcoins would simply be lost.
“Sweeping” the private keys from a paper wallet into a software or mobile wallet avoids this problem, as the keys are transferred to a new location in their entirety.
How Do You Use Paper Wallets?
Using a paper wallet doesn’t involve a lot of hassle. Users simply have to:
• Create the wallet addresses
• Print out the paper wallet
• Deposit coins to the public key address
Paper wallets typically include addresses in both QR code and alphanumeric format.
When a user wants to spend the funds stored on a paper wallet, they import or sweep the private key. To do this, a user must install a digital wallet on their desktop or mobile device that allows private keys to be imported (Electrum would be one example).
Crypto exchanges generally do not support this function.
Pros and Cons of Paper Wallets
Paper wallets represent a simple and inexpensive way to put small amounts of crypto into cold storage. But the cons outweigh the pros.
A paper wallet is, of course, made of paper, which means that water, fire, or the family pet could damage or destroy it. This could result in total loss of funds.
|Pros of paper wallets||Cons of paper wallets|
|Inexpensive||Not suitable for holding large amounts of coin|
|Easy to create||User error can result in total loss of funds|
|Secure cold storage||If someone gets hold of the wallet, they will have the private keys and can steal the coins|
|It can be difficult to bring the funds back online|
|Vulnerable to water or fire damage|
Alternatives to Paper Wallets
In addition to paper wallets, there are several other, more common types of virtual vaults to store different types of crypto.
Web wallets are hosted online in a web browser. These wallets can be convenient but are among the least secure types of hot wallets. They can be easily hacked and if something goes wrong with the web browser, the wallet could be lost.
Wallets like these have great utility value in that they are easy to use and can enable users to participate in different crypto applications.
Software wallets are basically desktop applications that come with a simple graphic user interface for sending and receiving transactions. While somewhat more secure than web wallets, software wallets are generally not considered good options for long-term storage of large amounts of crypto.
Funds held in a software wallet on someone’s personal computer can be vulnerable to hacking, a user could lose their password, or the device could be stolen or damaged.
Hardware wallets have been growing in popularity ever since a company called Trezor created the first one back in summer 2014. Later that same year, Ledger also created a hardware wallet. Both companies are still leaders in this space today.
Hardware wallets keep a user’s private keys securely stored offline in cold storage, like paper wallets. The big difference is that a user can easily bring a hardware wallet online and use it to make transactions. Hardware wallets are also much more durable than paper wallets.
Most users will find all of the wallet types listed above much easier to use than paper wallets with Bitcoin.
Some crypto exchanges also have integrated wallets, which allow users to store their crypto on the exchange. Exchange wallets are easy to use, but their security depends on the overall security of the exchange. Ideally, an exchange will offer users the option to use cold storage or multi-signature wallets.
A Bitcoin paper wallet isn’t recommended in the modern age of hardware wallets and other secure forms of cold storage. Paper wallets with Bitcoin are too vulnerable to human error and other factors to make them risky, especially for investors who want to use them over the long term and HODL their crypto investments.
These types of wallets represent a bygone relic of crypto’s earliest days. Unless someone is on a strict budget with only a small amount of coin to store, it’s hard to justify using a paper wallet to store your private keys.
Photo credit: iStock/Vladimir Sukhachev
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