DEFINITION of Paper Wallet
A paper wallet is an offline mechanism for storing Bitcoins. The process involves printing the private keys and Bitcoin addresses onto paper. Physical wallets, also known as "physical Bitcoins," are considered one of the safest ways to store Bitcoins; if properly constructed, and provided that certain precautions are taken, it will be nearly impossible for a hostile user to access your Bitcoin holdings. Images of physical Bitcoins are commonly seen in media coverage in innovative styles, mostly with a ‘new look’ of the coin and the private key printed either on paper, plastic, or metal.
BREAKING DOWN Paper Wallet
A paper wallet is considered an extremely secure way to keep Bitcoins safe from cyber-attacks, malware, etc. A paper wallet involves "printing" and storing Bitcoins in an offline mode. But it's important to remember that it’s not the Bitcoins that are being printed out like regular currency. It's the information stored in a Bitcoin wallet or digital wallet that gets printed out. The data appearing on the wallet includes the public key (wallet address), which allows people to transfer money into that wallet, and the private key, which gives access to fund spending. Thus, Bitcoins themselves are not stored offline, but the important keys are stored offline.
Most Bitcoin users generate paper wallets using open-source wallet generator, such as BitAddress.org, BitcoinpaperWallet.com, and WalletGenerator.net. It's generally advised that users unplug their Internet access while the keys are being generated, and that users wipe their Internet history after the keys have been created. Ideally, they'll be generated on a brand-new computer to completely avoid any malware interference. Of course, this won't be feasible for most users, but everyone should at the very least run a malware check on their computer before generating the keys.
This form of 'cold storage' confers enormous security advantages. The user is more or less invulnerable from cyberattacks and malware because it is simply not possible to access a user's private key via those avenues. Of course, the safety of these physical documents cannot be entirely guaranteed either - if a would-be hacker discovers the location of your paper wallet and physically steals it, they can access your Bitcoin holdings. Some users hide or disguise the paper wallet. The paper wallet should also be protected from physical damage - if the keys fade and can no longer be scanned, the user will never again be able to access the Bitcoins sent to that address. Even using the incorrect type of printer (non-laser printers can allow the ink to run, for example) may damage the paper wallet.
There are some companies that even offer "cold storage" services, i.e. keeping the private key in printed form in a physical location like a safe vault. Such companies are not regulated by the financial services industry, but they are insured against theft; however, this practice does reintroduce the element of risk involved with giving a third party responsibility for the keys.