Why would you keep money in a paper wallet?

We continue the occasional series looking at cryptocurrencies, blockchains, tangles, bubbles and other interesting concepts like mining, forks and paper wallets.

A paper wallet?  Now you have really disappeared down the rabbit hole!

An example paper wallet. Blockgeeks

A very difficult concept to get one’s head around is: “Where is my money?”  Perhaps reading Disney comics, with images of Scrooge McDuck frolicking around in his vault of money colours our thinking on this issue?

Scrooge McDuck (c) Disney

Possibly, a few of us have difficulty understanding that the ASB, BNZ, KiwiBank etc do not have a little pile of money in a vault somewhere with our name on it.  Our money is just ones and zeros in a computer somewhere in the bank and the fact that we can call up a balance on our banking app, or the local ATM, reassures us that the money is there for us when we need it.

Cryptocurrencies are not dissimilar; the money is represented by ones and zeros in computers, but there is no central organisation we can visit, no ATM we can check our balance on and not every currency has an app that will show your balance.

Just like your bank account has an “address” in the form of an account number, 12-3456-7890123-00, all cryptocurrencies are also stored at an address in the blockchain distributed ledger.  In the picture above there is a long string of characters under the label “Your Address” 0xEBf… etc.  That is where the money is.  To transact a cryptocurrency all you need is the other person’s public address.  If you enjoyed this series you can deposit Bitcoin at my address: 1P2XEaBLSa1JrSHysKaduzFJbDYdBoRuMW  – Thanks.

To access your money at your “address” in the bank, you need your PIN or your signature or your App login details.  

In the same way, to access your cryptocurrency at your address you need your private key.  In the example picture above that is the even longer string of characters under the words “Your Private Key”, that starts 8257b6e….

While most of us may be able to remember our bank app password, most mortals will not be able to remember a 64 character private key, so it is critical that this is stored securely.  If you forget your bank access details it is not a problem:  Ring the call centre and answer a few security questions and you will be back in the game.  

Not so with cryptocurrencies, there is no one to call.  Lose your private key and your money is gone forever. See here for the man who threw away the key to 7500 Bitcoin.

While it is true that there is “no central organisation we can visit” there is a huge number central exchanges where cryptocurrencies are traded from dollars or pounds and also exchanged between different cryptocurrencies, some for a small fee.  Each of these exchanges like Localbitcoins, Bitfinex, CEX, Whaleclub etc also provide wallets where you can store money.  However, it is a bad idea to leave your money stored in a wallet at an exchange as they have been hacked. See Nicehash, Mt Gox, Bithumb and so on.

So you need to keep your cryptocurrency where it is safe.  Storing your private keys as text in your computer is not safe either.  There is so much spyware around these days that paranoia is the watchword.  You can store your private keys on your computer, on a USB stick, or whatever so long as they are stored in a secure way.  Use a program like KeePass to store the keys and passwords in a securely encrypted database.  Another clever storage idea is the secure portfolio containing all the addresses and private keys that Easy Crypto provide for the coins you purchase through them. (Note: The operators of that site are personally known to the writer.)

You can buy electronic gizmos (hardware wallets) to store the private keys, but I am a suspicious chap and electronics can fail.  A piece of paper with the key printed on it is pretty foolproof. (Except in a house fire!)

So store your private keys electronically in a secured system on your computer, for ease of access so you don’t make a mistake typing it.  Then store that secured database in a cloud storage location, in case your computer is stolen or dies. And since belt and braces is not enough, use a piece of string as well and store your keys in a paper wallet printed out and stored in your safe, or bank deposit box, or whatever as a backup.   

Disclaimers:

  1. Neither the author nor WhaleOil are Registered or Authorised Financial Advisors and nothing written here should be construed as advice to buy or sell anything.  
  2.  The author owns a few cryptocurrencies, so is likely to be biased.

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In solidarity with the those in the world’s most despised demographic, WH has decided to ‘come out’ as an old white male. WH enjoys exercising the white-male privilege that Whaleoil provides for him by writing the occasional post challenging climate change consensus; looking at random tech issues that tweak his interest, as a bit of a tech nerd; or generally poking the borax at anyone in public life who goes on record revealing their stupidity. WH never excelled on the sports field because his coaches never allowed him to play in his preferred position on the right-wing. WH also enjoys his MG.

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