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What Are Paper Wallets And How Do They Work? 

Last Updated
Andrew Kamsky
Last Updated

Key Takeaways

  • Paper wallets were a popular method of offline cryptocurrency storage in the early days of Bitcoin. 
  • Paper wallets consist of a piece of paper with QR codes representing the private and public keys.
  • Paper wallets offer increased security by allowing users to hold their private keys offline. However, they can be susceptible to damage or loss, if not secured correctly.
  • Hardware wallets and hierarchical deterministic wallets are better alternatives to paper wallets as they offer enhanced security features and user-friendly interfaces.

What Is A Paper Wallet In Crypto?

In the early days of Bitcoin (BTC), paper wallets were a popular method of offline cryptocurrency storage, consisting of a piece of paper with QR codes representing the private and public keys. 

Paper wallets allowed users to hold their private keys offline and away from the hands of hackers. Paper wallets require users to print out their private keys or seed phrases on paper, which can be vulnerable to damage or loss. Additionally, if not generated securely, the private keys or seed phrases can be easily compromised, putting the entire wallet at risk.

As time went on, it became clear that paper wallets were not the most secure or practical option for storing crypto. As time progressed these wallets were easily lost, damaged, or destroyed, making them less practical for long-term storage of cryptocurrencies. Furthermore, they lack the user-friendly features and convenience offered by other types of wallets. They may have been fine back when there were no:

  • Mnemonic phrases: It is a series of 12-24 easily memorable words that represent a secret key used to access and manage a cryptocurrency wallet.
  • Hierarchical deterministic wallets: These wallets are a type of cryptocurrency wallet that generates a tree-like structure of public and private keys from a single seed, allowing users to manage multiple wallet addresses more efficiently and securely.

Nowadays, there are alternatives available, such as hardware wallets that offer greater ease of use and security and paper wallets today are considered obsolete technology.

How To Make Your Own Paper Wallet Securely

To generate a paper wallet securely, one may find the following steps helpful:

  • Secure number generation: Use a trusted offline random number generator, such as dice or specialized hardware to generate a random sequence of numbers. Convert the sequence of numbers into a private key using a tool such as Bitaddress.org  or a similar offline wallet generator. 
  • Generate a random private key: By simply moving your mouse and entering random text a unique key will be generated at random resulting in your private key.
  • Print or write down your key: Once you have generated your private key print it out or write it down on a piece of paper and store it in a secure location where only you have access.
  • Store your paper wallet in a safe place: Ideally, you should keep it in a fireproof and waterproof safe or a safety deposit box. It’s also crucial that you never share your private key with anyone.

By generating as many unique addresses as you’d like, paper wallets can be an effective way to securely store your cryptocurrency offline.  It’s important to remember that paper wallets do come with their own set of risks and limitations and were more of a common way to store cryptocurrency in the early days. Today, a variety of advanced cold storage wallet alternatives are available, providing users with enhanced security features and user-friendly interfaces for managing their cryptocurrencies.

Advantages Of Paper Wallets

A paper wallet can offer several advantages for storing cryptocurrency, as explained below:

  • Increased security: Paper wallets are considered a safe way to store cryptocurrency offline, which means they are not vulnerable to online hacking or other digital threats, providing an extra layer of protection for your assets.
  • Full control: The user has complete control over their cryptocurrency. Whereby no reliance on third-party services to store the funds is required, which can be vulnerable to hacking and other security breaches.
  • Low cost: Unlike hardware wallets or other storage solutions, paper wallets are virtually free to create. You only need to pay for the cost of printing and paper. If you have a safe storing position and prefer a paper wallet then this can be a cost effective way to store your cryptocurrency.
  • Anonymity: Paper wallets do not require any personal information to be linked to the cryptocurrency, which can offer an additional layer of anonymity to the user.
  • Ease of creation: Setting up a paper wallet is a relatively simple process that does not require specialized knowledge or equipment, making it accessible to a wide range of users.

It is essential to take appropriate precautions and store your paper wallet in a safe location to ensure its security, possibly considering additional protective measures like laminating the wallet or storing it in a fireproof container..

Flaws And Risks Of Using Paper Wallets

While paper wallets were once a popular storage option for cryptocurrency, they come with a number of risks and downsides that need to be considered:

  • Paper wallets are physical items: This basically means that they are subject to loss, theft, or damage, which could result in the loss of all cryptocurrency stored on the wallet. Imagine you have a pet at home and he decides to take a nibble on your paper wallet.
  • Creating paper wallets can be a somewhat technical process: Crypto is a new area and with it comes human error that may result in loss of funds if you make a mistake when creating your paper wallet. If a mistake is made when transcribing public or private keys, it could lead to the permanent loss of your cryptocurrency.
  • If the paper wallet private key is not stored securely: A compromised computer or printer could result in hackers gaining access to the private key information, and therefore access to the funds stored on the wallet.
  • Paper wallets have become obsolete: Hardware wallets offer a much higher level of security and are specifically designed to protect private keys from potential attackers.
  • Limited accessibility: Paper wallets do not provide the convenience of easily accessing and managing cryptocurrency, as they are not connected to any software or user interface. This makes it harder to use the stored funds for daily transactions, requiring manual transfer of assets to a software wallet or exchange before they can be spent or traded.
  • Lack of updates and support: Unlike software or hardware wallets, paper wallets cannot receive updates to improve security or add new features. This can limit the wallet’s functionality and compatibility with new developments in the cryptocurrency ecosystem. Additionally, there is no customer support available for paper wallet users, which could leave users without assistance. 

Other Ways To Secure Your Cryptocurrencies

If a user is looking for a more secure way to store cryptocurrencies compared to a paper wallet, there are several other alternatives available. 

Custodial wallets are a type of digital wallet where a third party holds and manages your cryptocurrency. For example exchanges like Coinbase  and Kraken  can act as custodians of your cryptocurrency. Holders should exercise caution, though, and keep in mind, “not your keys, not your coins.” This emphasizes that there is a risk of losing or having your cryptocurrency stolen if you rely on a custodial wallet where your private keys are held by someone else. To guarantee the security of your digital assets, it’s essential to use caution and pick reputable wallet providers. 

Digital wallets or hot wallets offer an added layer of security as the coins are directly held by the user. Security metrics, such as two-factor authentication , multi-signature support and these wallets can connect to hardware wallets for added security. 

Hardware wallets, like Ledger Nano X  and Trezor  models, which are forms of non-custodial wallets, are designed specifically to protect the users private keys and are also easier to use compared to paper wallets.  These cold storage wallets are completely offline and offer the highest level of security, although they may be less convenient. 

The Future Of Paper Wallets

Paper wallets were once a popular option for storing cryptocurrencies, however, advancements in technology have made them less practical and secure. While paper wallets offer benefits such as increased security, full control, low cost, and anonymity, they also come with risks and downsides such as vulnerability to loss, theft, damage, human error, hacking, and malware. As a result, digital wallets have emerged as a safer and more convenient alternative, offering increased security, two-factor authentication, and multi-signature support. 

Hardware wallets provide even greater security, designed specifically to protect private keys from potential attackers, while cold storage wallets offer the highest level of security but may be less convenient. Ultimately, it is up to each individual to determine which option best suits their needs and preferences when it comes to storing their valuable cryptocurrency.

FAQs:

Are paper wallets secure for storing cryptocurrency? 

Paper wallets offer an offline storage option, which provides an extra layer of security compared to online wallets. They are susceptible to physical risks like loss, theft, or damage. If not generated securely, the private keys can be compromised. It is important to take appropriate precautions and store paper wallets in a safe location.

How do I create a paper wallet securely? 

To create a paper wallet securely, start by using a trusted offline random number generator to generate a secure private key. Then, convert the random sequence of numbers into a private key using a reliable offline wallet generator. Next, print or write down your private key on paper and make sure to store it in a secure location.

What are the advantages of using a paper wallet? 

Some advantages of paper wallets include increased security by storing cryptocurrency offline, being away from online threats, and having full control over your funds without relying on third-party services. It is considered a low-cost option to store crypto, as paper wallets are virtually free to create.

What are the risks and limitations of paper wallets? 

Paper wallets come with certain risks and limitations, such as physical vulnerabilities like loss, theft, or damage to the physical piece of paper and human error during the creation process, potentially resulting in the permanent loss of funds. Finally, other risks include, compromise of the private key if not stored securely and obsolescence compared to the more advanced cold storage options like hardware wallets.

Are paper wallets still recommended for storing cryptocurrency?

While paper wallets were popular in the early days of Bitcoin, they are now considered obsolete technology. More advanced storage options like hardware wallets provide better security and user-friendly features. It’s recommended to consider alternative solutions for storing cryptocurrency securely, especially if you are looking for long-term storage or frequent transactions.