One of the first things new cryptocurrency users learn is that they need some sort of digital wallet through which they can store their coins. There are many different kinds including both hardware and software wallets. There is also the paper wallet. It is considered one of the most secure ways to store cryptocurrency assets.
How much do you know about the paper wallet? If you are new to the cryptocurrency game, you might not understand what it is and how it works. No worries. This post is specifically for you. It will explain exactly how paper wallets work and why and how they can be used.
As you read, please bear in mind that there is no 100% foolproof way to store digital assets. There is risk involved in any kind of asset you might put your money into. The best you can do with cryptocurrency is take all the appropriate precautions to keep your assets safe. Most of the time that will be enough.
Digital Wallets explained
The place to start is explaining exactly what a digital wallet is. Just like cryptocurrency consists of computer code and transaction records stored in digital format, a digital wallet is really nothing more than computer code. The code contains information about the coins you possess at any given time.
A good way to visualize a digital wallet is to think of one of the file folders on your computer. That file folder is intangible. It is not something you can physically hold in your hand. Rather, it is just data on your computer that is represented visually on your screen as a folder. Your computer sees the folder as just an address on the hard drive.
When you move files into that folder, you see the visual representation on your screen. It represents what you might see if you had a paper folder filled with paper documents. But again, the computer only sees document data and a series of hard drive addresses. Every file you put into your folder has an address that gets linked to the folder's address.
This is essentially how a paper wallet works. Your paper wallet is digital data with a specific address on the cryptocurrency network. Every coin you own also has an address on the network. The two are linked together to create ownership.
Why they are necessary
Next, you probably want to know why digital wallets are even necessary. It is as simple as the fact that cryptocurrency, like the file folder on your computer, is not tangible. There are no minted coins or printed bills associated with Bitcoin or any of the other cryptocurrencies out there. Cryptocurrency coins exist only as digital tokens.
Digital wallets are required to assign ownership of said tokens. This is necessary due to the decentralized nature of cryptocurrency. Because Bitcoin is decentralized, there is no single authority with control over the network. Therefore, there is no way to assign ownership of tokens outside of giving each individual member a means of recording that ownership. This is the purpose of the digital wallet.
A digital wallet is your means of declaring and maintaining ownership over your tokens. It is your only method for doing so, which is why cryptocurrency experts continually warn users to be careful with their wallets. If your wallet is ever lost or stolen, it is likely unrecoverable. Lose your wallet and you forever lose your coins. It is that simple.
If you didn't have a digital wallet, there would be no means by which to declare your ownership of tokens. The good news is that digital wallets come in many forms. You can store your coins in an online wallet, in a digital wallet on your computer or laptop, or even the paper wallet.
How a Paper Wallet works
A paper wallet is pretty simple to understand once you wrap your brain around how digital wallets work. Remember that a digital wallet is nothing but computer code that determines ownership of coins. A paper wallet is simply a representation of that computer code printed on a piece of paper by way of a QR code.
Are you familiar with the QR codes your mobile phone can scan to get information about a product or service? A paper wallet generator encapsulates the digital information about your cryptocurrency, encrypts the information, and then prints out a QR code containing the information.
Most people who utilize paper wallets rely on an open-source paper wallet generator that does the heavy lifting. There are many of them available online. You just login, create a random key to be assigned to your wallet, and press the 'submit' button. The paper wallet generator creates the code, assigns the key, and generates a QR code ready for printing.
You can print the code using a laser or inkjet printer. If done properly, you should actually see two QR codes. One pertains to your private key while the other is a public key. Both keys are necessary to move coins in and out of your wallet.
That is really all there is to creating a paper wallet. However, it is not wise to just print out the data and forget about it. There are other considerations for keeping your digital assets safe.
After printing your Paper Wallet
A piece of paper with two QR codes on it could represent all the digital assets you own. If you are more than just a casual Bitcoin user, that piece of paper could be extremely important to your financial future. So take some extra precautions to keep it safe.
First and foremost, paper wallets should be printed using high-quality laser printers and high-quality printer paper. This reduces the risk of the ink fading or running over time. You can make your paper wallet even more secure by laminating it after printing. And of course, printing multiple copies isn't a bad idea either.
Next up is storage. If you are going to the trouble of printing a digital wallet for security's sake, do not just put the piece of paper in your desk drawer and forget about it. A paper wallet stored in a desk drawer could be destroyed in a house fire. It could be stolen by a burglar. An uninformed family member could misplace it when it is time to move to a new house.
Cryptocurrency experts generally recommend storing paper wallets in secure locations other than your home. A safe deposit box down at the bank is a good example. If you are storing a copy at home for convenience, store in a waterproof, fireproof personal safe. Then place the safe somewhere that makes it unlikely to be found by burglars.
Dealing with your computer
One thing people forget about when printing paper wallets is leaving a digital trail on their computers. Thank goodness that it's easy to get rid of any such trails. It is as easy as clearing your cache. Go into the settings of your web browser and dig around until you see a heading having to do with privacy. Under that heading should be an option to clear the browser cache.
You will want to make sure everything is cleared - including your browsing history, cookies, etc. Make sure to shut down the browser and do a complete cold restart to complete the purge. Otherwise, you might be leaving behind digital information that can be used to steal your wallet and coins.
It should be obvious that generating paper wallets on a public computer is a bad idea. Do not ever use a library computer, a hotel lobby computer, or any other public computer to do anything with cryptocurrency. It is just too risky. It's also a bad idea to generate and print paper wallets using a smartphone. Smartphones are just too insecure for the task.
Hot and cold storage
As we close out this post, a reminder of hot and cold storage is in order. A paper wallet is considered cold storage because it is not connected to the internet. In fact, that is one of the big advantages of paper wallets. Other means of cold storage include USB thumb drives, CDs and DVDs, and purpose-built crypto storage devices.
Hot storage is considered any form of storage that is either connected to the internet at all times or can be easily connected. If you are storing your digital assets on your laptop or desktop computer, and your computer has access to the internet, you are dealing with hot storage. You are also utilizing hot storage if you store your digital assets online.
The biggest disadvantage of hot storage is security. Every form of hot storage is inherently risky because hackers can get at your coins if they work hard enough. As such, it is always a good idea to use cold storage for most of your digital assets.
Now you know everything you need to know about paper wallets. If you are new to cryptocurrency, consider utilizing a paper wallet for most of your assets. Keep 10% or so in hot storage so that you can trade easily but store the remaining 90% in a paper wallet or some other form of cold storage. It is the best way to protect your assets.