If you have ever Googled Bitcoin you have probably seen images such as these pop up:
These are examples of what are called paper wallets. A wallet in the cryptocurrency sense is the pairing of a public payment address and a private key. Wallets can be hosted online such as at exchanges like Crypsy or Coinbase or CEX.IO, hosted on your computer (Bitcoin wallets available here, Litecoin wallet available here), or as in this case, printed on paper.
The two key components of a paper wallet (or any wallet for that matter):
- Public Payment Address: This is where anyone sending you coin would address the payment to, and is often refereed to as your Bitcoin or Litecoin address. These addresses are NOT a secret, and you should not be concerned about sharing them. A Bitcoin address is a sting of 27 to 34 alphanumeric characters starting in either a 1 or a 3, and looks like this 171w5mkp3Z4vrAGwDTof5RYcn65PnbJdC3. The address is often shown as a QR code. Liteoin addresses look very similar, also often are shown as QR codes, are 33 characters long and start with a L.
- Private Key: The private key is literally the keys to your coins, if someone was to obtain it, they could withdraw the funds currently in the wallet, and any funds that might be deposited in that wallet in the future. PROTECT YOUR PRIVATE KEYS!!!! For paper wallets, the key is typically in the Wallet Import Format (WIF). WIF keys are quite short at 51 characters, mainly to make them easier to enter into electronic wallets when you transfer, also known as sweeping, the funds from the paper wallet to the electronic. These keys can also be shown as QR codes. Important Note: The private keys of paper wallets should NEVER be saved to a computer hard drive, online cloud service or email.
So understanding this, it should become clear that a paper wallet really is nothing more than two paired strings of characters, the address and the private key. The pictured examples above are admittedly pretty cool looking, especially if you’re a Dr. Evil fan, but they are really just window dressing.
As an example, this paper wallet:
Is exactly the same as this paper wallet:
Which is exactly the same as this paper wallet:
All three of these have the same Bitcoin address and the same private key, all three are just as valid and functional, save the convenience the first two offer via the QR code.
Before we get to the how, lets go over the why.
There are many reasons to create and fund a paper wallet, here are a few:
- Security, security, security. Holding coin in a paper wallet safeguards the coin form cyber attacks (if you create it securely, more on this in a bit) by removing your coin from all forms of electronic storage. Just remember, if it is connected to the internet, it is vulnerable…period.
- Protection from corrupted or faulty hard drives or operating systems, i.e. your 98th reinstall of ubuntu just went belly up…again. No worries, your coin is safe and sound.
- Protection from a lost phone. Only have a wallet on your phone, ever lose your phone? Yeah me too…
- They make a great gift! Don’t scoff, this is where some of those fancy smancy wallets pictured above come in handy. You can print one out and fund it to whatever value you like for a unique an interesting gift. It is also a great way to get someone into cryptocurrency.
- Longterm storage of coin. Not going to be trading or spending it anytime soon? Then why keep a large balance online where it is vulnerable. Put it in cold storage and sleep soundly.
- It becomes real! Okay you can scoff at this one a bit, but some people prefer the tangible to the cyber, and having printed coin in the form of a paper wallet brings them comfort and peace of mind, to each their own.
- Did I mention security, security, security?
So now for the how.
I should start by stating you can never be too security cautious when it comes to your cryptocurrency wallets, be they electronic or paper. You need to take every step possible to protect your holdings, which in this case amounts to protecting your private key(s). That said, what “every step possible” is to one person may be worlds apart from what it is to another. This is where you need to find your own comfort level, I personally fall somewhere in the rather cautious and diligent realm. This is to say I am a long way away from sweeping for bugs and wearing tinfoil hats, but I do take steps others might find excessive. Of course, if my portfolio was to grow to a staggering amount, I’m pretty sure I could make a tinfoil hat look damn good.
The short version (i.e. don’t do JUST this):
- Go to one of several free websites and create a wallet pair of address & key
- Print it out
- Send funds to the address
- Store paper wallet someplace safe
Lets flesh these steps out a bit.
Create an address & private key pair.
There are two main ways this can be done, using an online tool to create the wallet, or using a utility program such as the Bitcoin Address Utility which you can find here, or the Litecoinaddress client here. For our purposes, let’s focus on the online tools available at websites such as these.
Any one of these options can quickly and easily produce a wallet for you, but you need to give some serious thought to how to safely use them. If your computer is online when you use them, you are vulnerable. So it is HIGHLY suggested that at a minimum you:
- Go to one of the sites listed above and let it load
- Then take the computer offline completely (LAN, Wifi, Bluetooth, AirPlay, etc.)
- Now follow the directions to generate the wallet(s). This is normally done by erratically moving the mouse around to drive a random generator which will produce the private key(s)
- Print the wallet(s)
- Clear out all your cache, including the printers if it has memory
- Log back on to the net
- Transfer coins to the wallet(s)
- Verify the funds are there
- Securely store the paper wallet(s)
That is the minimum suggestion and maybe you feel that is good enough for you. Maybe you have good karma, or you’re not storing that much coin so really what’s all the fuss, or maybe you are blissfully ignorant and like it that way. It is your money so whatever floats your boat.
For the rest of us who prefer a more secure means of offline wallet creation, the process follows the fundamental steps listed above with one BIG difference. Do all the above, except going online, from a dedicated, clean, never been connected to the internet operating system! The easiest way I have found to do this is by utilizing live-boot Linux run from a USB flash drive, though I know others who prefer a new clean install of an OS running in a virtual machine. By using a live-boot Linux when you reboot your computer, all cache files are deleted from memory and no jobs are ever written to disk.
I have the wallet(s), now what?
Let’s assume you are looking at the wallet, or wallets on your screen. You can, and probably should, create several wallets at one time, this is advantageous for two main reasons. First, I firmly believe it is better to have ten wallets with 10BTC in each than to have one wallet with 100BTC in it. By spreading the coin out over multiple wallets you decrease your chance of unrecoverable loss should the paper wallet get destroyed or stolen. The second reason deals with how transactions within the protocol, the subject of change, and using paper wallets, we will go into that a bit later.
The next thing you will need to do is print the wallets. Give some thought to how you are going to do this. A paper wallet functions like cash in that if you lose it, or it gets destroyed, the coin it holds is gone forever. With that in mind, I opt to print my paper wallets with a laser printer on thick coated paper as laser prints stand up to moisture far better than inkjet prints.
Tip: Print more than one copy of each wallet and store them in different locations as a safeguard against loss due to unforeseen circumstances.
Once printed, it is time to transfer funds to the wallets. I assume you are familiar with how to transfer coins to an address so I will not go into detail here. Suffice it to say, transferring a coin to a paper wallet is no different than transferring between electronic wallets.
I do strongly suggest you verify that the coin transferred fully. You can do this by entering the paper wallet’s address into one of several websites that search the blockchains.
The nature of how Bitcoin and Litecoin’s blockchains work makes it feasible to search all deposit, withdraw and balance information for any given address. Though this is a very useful tool, being a big fan of privacy, I also consider this another good reason to have multiple wallets and have your holdings dispersed among them.
For Bitcoin I suggest using blockchain.info, for Litecoin I suggest using ltc.block-explorer.com or ltc.blockr.io
Once you have verified the funds are in the wallets, it is time to store them someplace safe and protected from moisture, rodents, your mother-in-law, the kids, and any other destructive forces. I keep mine locked away in multiple locations to mitigate against loss due to fire or theft. It is also a good idea to fold them in such a way, or otherwise obscure them so that the payment address and the private key are not visible at the same time without intending them to be so. In today’s world of camera phones and social media, more than a few paper wallets have unwittingly ended up pictured online and subsequently and quickly fleeced.
There are several companies that sell specialty items such as holographic tape, QR code cover stickers, and other clever and good-looking supplies to help you both secure and customize your paper wallets.
Important difference to understand – Change
There is a very important difference you need to understand when it comes to using a paper wallet as compared to just using a computer-based wallet such as Bitcoin-QT.
When you initiate a transaction that does not account for the total balance of a wallet, say you send a buddy 1BTC out of a total of 10BTC in your Bitcoin-QT. client, the client utilizes a “change” address. This “change” address in our scenario would receive the remaining 9BTC from the original 10BTC. This all happens behind the scene and you never see this address, and your Bitcoin-QT wallet will still show that it has a balance of 9BTC.
The difference you need to understand with paper wallets is if we take the same scenario from above and add a paper wallet to the mix when you import or sweep your private key to your Bitcoin-QT client and then send your buddy the 1BTC, the paper wallet will not end up with a balance of 9BTC, it will in fact have a 0BTC balance as the remaining 9BTC will move to a change account. You could move it back, but you will have exposed your paper wallet’s private key to an internet-connected computer when you swept it, so transferring the 9BTC back to the original paper wallet is a security risk. The better option is to move it to an entirely new paper wallet. See I told you I would give you another reason to create more than one wallet at a time 🙂
If you want to understand the concept of “change” more clearly as it pertains to Bitcoin and other cryptocurrencies, read this article.
Sweeping your paper wallet into Bitcoin-QT or Litecoin-QT
So the time has come to bring your coin out of cold storage. There are of course many wallets/clients out there, I use Bitcoin-QT and Litecoin-QT so I will speak to those. If you have experience with other wallets you are willing to share, please post in the comments section below.
To sweep the coin from your paper wallet into Bitcoin-QT or Litecoin-QT:
- Run Bitcoin-QT or Litecoin-QT
- Select Help (to the right of Settings)
- Select Debug Window
- Select Console
- Next to the > input box type
importprivkey 5Kjp97fafTzBQTUgfeJCzSwr21tWhtHT7B1PF6WK9hhVic7NWUH I hope this posting was helpful and you consider utilizing paper wallets to safeguard your coins and share the opportunity of cryptocurrency by using them for gifts.