We already know how Bitcoins are mined and how the transactions are done. The next question is how and where do you store them? With fiat money, you can store it in your wallet, and Bitcoins are slightly different. Bitcoins reside in the blockchain, but we store their private access keys in a Bitcoin wallet. In other words, access to your Bitcoin wallet and private keys means full access to your Bitcoins. That is because the usage of Bitcoins is anonymous, and you cannot tag your Bitcoins with your real world ID.
We Have Five Different Types Of Bitcoin Wallets
In this guide, we are going to look at Paper wallets. A paper wallet is one of the safest ways to keep your Bitcoins safe, and one of the cheapest as well. Some websites can make a paper wallet for you. To do that, they generate images that contain your Bitcoin addresses and two QR codes. One of the QR codes contains a public address that you can use to receive Bitcoins. The other QR code contains a private address that you may use to spend your Bitcoins. It anonymously identifies you as the owner of your Bitcoins.
Types of Paper Wallets
There are two types of paper wallets. That’s the encrypted and the unencrypted paper wallets. The unencrypted paper wallet allows you to access your QR codes without using a password. You simply scan it and get your private and public keys. Therefore, it poses a huge risk if someone were to get hold of your paper wallet. If that happens, they will just scan it and get the private address of your Bitcoins. However, they are not accessible from online, which makes them safe from cyber attacks.
An encrypted wallet is different in the sense that the addresses contained in the QR code are scrambled using the BIP-38 encryption technology. The technology requires that you provide a passkey that was used to encrypt the files to access. That makes it hard for someone to steal your Bitcoins by scanning the QR code with your private key.
Step-By-Step Instructions On How To Create A Paper Wallet
Creating a paper wallet is an easy process. You can also use the Bitcoinpaperwallet.com to make sophisticated paper wallets. Furthermore, the site provides you with an Ubuntu live-boot CD that comes with paper wallet software pre-installed. In the following 10 steps, we outline how you can create your paper wallet from BitAdress.org in your browser.
Create a Paper Wallet Using These 10 Simple Steps
- Open a new tab in your browser and go to BitAddress.org
- From the homepage, BitAddress.org will ask you to either enter random keys or move your cursor around the screen. Either of those actions will generate random characters that the site will use to generate your addresses.
- BitAddress.org will present you with private and public keys and their respective QR codes. You should not scan them.
- Next, you need to click the “Paper Wallet” tab.
- Select the number of addresses that you wish to generate.
- You may want to keep the Bitcoin artwork. However, you can click “Hide Art” button to exclude it.
- If you wish to have your addresses encrypted for additional protection, click the “BIP38 Encrypt?” button. Once you do that, you will be required to enter your password in the “paraphrase box.” You must provide that password to decrypt your addresses.
- Finally, create your new wallets by clicking the “Generate” button. One wallet has only two QR codes.
- You can now print your paper wallet or wallets and have them as a hard copy.
- When printing, BitAddress.org will ask you to choose a printer it should use to print your paper wallet. If you are using Chrome, you will have an option to print your paper wallet as a PDF file.
How to Transfer Funds In And Out Of Your Paper Wallet
Your paper wallet can receive funds as often as you like, but it can only transfer out just once. Whatever balance is there, it will become inaccessible. Therefore, you should treat it as you would a piggy bank.
How to Transfer Funds to Your Paper Wallet
You can transfer funds from your existing virtual wallets such as Bitcoin-Qt, Mycelium, or Electron. You can also do it from web wallets such as coinbase.com or blockchain.info to the public address shown on your paper wallet.
Just open the live wallet and transfer the funds, as you would do to any public address. Use the paper wallet’s public address to receive funds.
How to Withdraw or Spend Bitcoins Using Your Paper Wallet
What you need to do to access your Bitcoins from your paper wallet is to “sweep” or “import” from your paper wallet.
That action will transfer all access from the paper wallet to a live wallet such as coinbase.com, blockchain.info, Bitcoin-Qt, etc. Only wallets that have the “import private key” feature will be able to accept the transfer from your paper wallet. Most popular live wallets have that feature.
You must sweep or import the complete balance; any Bitcoins left in the paper wallet will become inaccessible permanently. That is because the paper wallet cannot process new addresses for your new Bitcoin balance.
BIP38-Encrypted Paper Wallets
Many live wallets will not be able to import BIP38-Encrypted private keys. To import the unencrypted format of your key, use the generator’s “Validate” feature to extract it first. That is an intermediate step. You will need to take it to sweep or import your balance from the paper wallet to your live wallet.
How Secure Is Paper Wallet
Creating a 100% secure paper wallet requires that you have some technical knowledge, a printer, offline or bootable operating system, and a flash drive. You need an offline wallet generating system to ensure that the private address keys you will generate are indeed 100% private.
Generate your private address keys online does not guarantee you total privacy. There is a risk that your machine is infected by malware, which can then steal your keys are soon as they are generated. While the website that offers Paper Wallet generation services could be trustworthy, there is always a chance that your connection to that website could be hijacked.
You also need to make sure that your Bitcoin address keys are encrypted. That’s important because you cannot guarantee that someone will never get hold of your paper wallet. If that happens and it’s not encrypted, you could easily lose all your Bitcoins.
Finally, there is the issue of losing your paper wallet, or simply getting them destroyed by water or fire. That is a risk that you will not vulnerable to when using a live wallet. However, you could mitigate that risk by backing up your paper wallet.
A paper wallet is only able to record the private key and address of your Bitcoins. That means when spending or transferring your Bitcoins from the software of the live wallet has to learn about the balance in that particular address before spending it. Most secure live wallets will choose to sweep the private key into the Bitcoin-Qt and do rescanning. Someone watching the Bitcoin-Qt full node as it does the scanning from the outside will not be able to tell the address it’s processing. That’s because there are no transmissions, everything happens locally on the storage disk.
Unfortunately, that process is quite slow because it has to go through close to 1 terabyte of addresses. That means there are quite a few people who will have the database locally so that they can use it occasionally to process their paper wallets. If you are in a hurry, you will be forced to use public blockchain servers that are faster and efficient. Such centralized servers can spy on users and find out how much Bitcoins they have, as well as their past spending history.
Most software on phones relies on centralized lookups whenever they redeem paper wallets. That’s why it’s not recommended to use paper wallets. Paper wallets will push you to ruin your privacy and anonymity that Bitcoin is supposed to provide.
• Paper wallets are immune to cyber attacks. You only need to make sure that you didn’t leave its image behind, either in the printer or the PC.
• Paper wallets ensure that all your private keys are in your possession. That’s unlike third party wallet services that may move your keys without your permission.
• If you choose to use paper wallets, you will only need to make a one-time investment of your devices to generate and protect your Bitcoin private keys securely.
• You can use encryption to secure your paper wallet in case of theft.
• A paper wallet is simply a printed piece of paper with your Bitcoin addresses. It is therefore susceptible to getting burnt, torn, or soaked.
• You will physically possess your Bitcoin paper wallet. That means someone can take it from you and spend all your Bitcoins. That is because the paper wallet has all they need to access your Bitcoins.
• It’s is easy for someone to get a copy of your keys during the generation and printing stages. That can happen when using a computer or printer that is online to generate or print your paper wallet.
While paper wallets are secure when created correctly, redeeming paper wallets possess a privacy risk. Furthermore, if you generate them with a machine infected with spying malware, you stand to lose whatever the malware picks. You will also need to worry about physically securing your paper wallets as you would Fiat money. That’s because everything that you need to spend your Bitcoin is printed on the paper wallet.
Having said that, you will realize that paper wallet allows you to have greater control of your Bitcoins. Unlike when they are held by a third party virtual wallet, holding them securely in your paper wallet means that no one can transfer or spend them without your permission. Paper wallets are therefore the best when storing your Bitcoins for prolonged periods. The choice to use not to use paper wallets will depend on your Bitcoin needs. Just be sure to encrypt, secure, and backup your paper wallet.
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