Out of many Bitcoin storage methods; paper wallets are perhaps the least understood of all. Often paper wallets are considered to be the most secure way of storing Bitcoin and cryptocurrencies. Well, it’s true. However paper wallets also come with some serious drawbacks and most users are not aware of the paper wallet risks. This method of storage is obsolete and considered to be unsafe. Without completely understanding the dangers of using paper wallet; the risks of losing your coins are high.
The following guide should be helpful in understanding the most misunderstood cryptocurrency storage method, paper wallet. This post also shares some of the common reasons why one should avoid using this wallet storage method.
Now before understanding the flaws and risks of paper wallet let’s quickly take a look at what is a paper wallet and how it works?
First of all; A cryptocurrency wallet is a digital wallet similar to your real-world wallet that allows you to store, send and receive cryptocurrencies. But it doesn’t actually store coins as you store money in your wallet. Instead a cryptocurrency wallet holds public and private keys which in turn allows the user to send and receive coins.
Now paper wallet is a type of Bitcoin wallet that works by holding a single private key and a Bitcoin address (public address). Paper wallets are usually generated by a website. The information generated such as public and private key of the Bitcoin address can be physically printed out on a piece of paper. Since the secret private key which is needed to spend Bitcoin is written and kept offline this method of storage is called cold storage wallet.
How it works?
Anyways for security reasons, during the process of paper wallet creation it is advised that you disconnect your Internet connection. Once the connection is unplugged move your mouse around and/or type random key strokes to generate the keys. After the keys are created you can print the wallet or write down both the public address and private key in a piece of paper.
Now to start receiving Bitcoin to this wallet address share the public address. To spend Bitcoin from this address you can either scan the QR code of the private key or you can import private key to a software wallet that allows you to spend the Bitcoins. It’s that simple! But are they safe?
Are paper wallets safe?
Yes, with this method you have full control of your private keys and they are totally safe for storing Bitcoins. Since the keys are stored offline; paper wallets are considered to be extremely safe from malware and other cyber attacks.
While it is safe from hackers online the actual risks comes in protecting the private keys. You need to understand that private keys are the most essential element to accessing the coins. If someone obtains it or if you lose this key then your Bitcoins are lost.
As long as the keys in your paper wallet is protected there is no risk of losing your coins. So only thing you need to ensure is that the paper wallet that holds your keys are free from any damage such as water, fire and theft. However still paper wallets has large number of downsides and the bigger risk comes down to user error.
Paper wallet risks & flaws
Let’s look at some of the reasons why you should avoid storing Bitcoins in a paper wallet.
1. Malware risks
Most paper wallet services are browser based which are usually provided by a third party website. There is no official service for this. So when you are generating keys from these sites you are actually trusting the website operator.
Well you can download the tool locally, disconnect the Internet and then generate keys. But still during the creation process your private keys are prone to malware attacks.
If the computer from which you generate these keys are already infected with key loggers or any malware’s then there is a high chance your private keys are at risk. Once your PC is connected online the keys will be then sent to the hackers server.
So make sure to perform full malware scan and stay offline during the paper wallet creation.
2. Printing risks
Once you’ve generated the paper wallet securely you’ll now have to note down this key information. Since the private / public keys are long and case sensitive; writing it down in a paper manually is not going to work. The only solution is to print it and that opens up another security risk.
Make sure you are not printing your keys using a shared public printer such as in schools, college, office, internet cafe and libraries. These printers are centrally logged and your information will be stored in IT team’s database.
If you are printing from own device from your home computer you still need to make sure it is not a WiFi connected printer. Modern printer these days come with internal drives and they store your printed information in a un-encrypted form which is highly risky.
Ensure that your printer is old and dumb enough to read what your are printing. But unfortunately even these old school printers still puts your keys at the risk. For example; using inexpensive ink or having lousy printing performance or power interruption are likely going to render your paper wallet useless.
3. Wear and tear
Bitcoins stored in your paper wallets are generally safe as long as the paper is not stolen, lost, ripped or damaged. You need to understand that papers are bound to degrade and decompose. Also the ink bleeds and fades with time rendering your coins inaccessible in the distant future. This is why aside from printing it in a piece of paper you should also engrave the public / private keys on a metal or any material that is considered durable.
You can then store these multiple copies in a different location that you consider to be safe from water, fire and theft.
4. Human errors
For many users the bigger risk of using paper wallet comes down to human errors. One can accidentally damage the paper. An user can forget where they stored their paper wallet. A printer printing the keys and QR code incorrectly and the user go unnoticed. All of these leads to loss of funds.
5. Dealing with raw private keys
Dealing with raw private keys are very dangerous. Since the private keys are long and case sensitive there is a high chance of making mistakes when printing or writing it down. If a single character is mistakenly typed then the private key becomes invalid and you’ll lose your Bitcoins forever.
Also to spend Bitcoins from paper wallet one has to still use a software wallet. Most beginners import the private keys to HD wallet which puts their coins at risk and is not a correct method.
6. Change address mismanagement
Understand that when you import private key the key doesn’t become part of the wallet. Therefore when you spend part of the coins from the paper wallet address the change output will be send to different Bitcoin address that is managed by the wallet.
Most users do not understand this. They do not backup the wallet (electrum backup) which they used to import the paper wallet private keys. After spending they just delete the wallet thinking that their balance stays in the same address. Only later they notice the change coins are no longer in paper wallet but is send to an address that is generated by a software wallet for which they don’t have a backup.
The best way to spend Bitcoins from paper wallet is to sweep the keys to wallet software. It sends the entire paper wallet balance to the deterministic wallet software.
7. Promotes address reuse
With paper wallet you only get to maintain one public address which in turn promotes address reuse. Understand that when you are reusing your Bitcoin address you are basically putting your privacy at risk. It becomes easy for someone to track your entire transaction history on the block explorer.
This is why software wallets (HD wallet) generates new BTC address after every incoming transaction.
8. Privacy issues
Despite the name, paper wallet is not actually a wallet. They do not provide you the transaction history and they do not tell you how much balance the address has. To lookup all those information you have to rely on third party blockchain explorers which again puts your privacy at risk.
Paper wallets are outdated
Paper wallets were popular between 2011 and 2016. Hardware wallets and Hierarchical deterministic wallets (BIP 0032) have rendered paper wallet obsolete. In current generation their use is highly discouraged due to the risks associated with it.
But still if you are looking for a long term, untouchable Bitcoin storage method then paper wallets are good. The main advantages are it offers cold storage and is cheaper than a hardware wallet. However still to use this wallet efficiently one require a great deal of understanding and experience. The risks associated with paper wallet outweighs the security benefits.
So what is the best way to store crypto?
The best way to store crypto
The most secure way to store cryptocurrencies is by using a hardware wallet which uses human readable seed phrases instead of raw private keys (BIP 0039). This is the best solution and the most widely used method for storing Bitcoins. This process eliminates the process of printing keys. Instead all you have to do is write down the 12 or 24 random seed words to backup the entire wallet. In addition to this you can also encrypt the seed words which makes it nearly impossible for any hostile user to access your Bitcoins.