In addition to online and software-based wallets, another option for storing bitcoins is offline storage, either on physical mediums like CDs or USB keys or even on paper.
A private key, which allows you to send transactions from a specific bitcoin address, is actually quite small. For example, the bitcoin address XeUeNpFjbQK45ri73FWbvoXHdFT has the private key SfN0hAdCmtSkvwOkjv9QMRw9vXluVMJCd7O3kCAnIjwf5ok886. These two strings are all you need to send and receive transactions from that address, and you can store them even on paper if you prefer. The reason this works is that your wallet doesn't actually hold the bitcoins themselves; they are stored in the public blockchain. Your wallet stores the necessary keys to access and use those bitcoins. The only time you need to be connected to the internet is when you actually want to spend the bitcoins using a client.
Advantages of offline wallet storage include:
Strong Security Potential: By keeping your private keys offline, they are protected from viruses and other malware until you use them. This offers a high level of security.
Enhanced Privacy: Maintaining fine-grained control over each address you own allows you to potentially prevent the linkage of your transactions.
Offline Receipt of Bitcoins: Even when your wallet is offline, you can still receive bitcoins since you are only storing the keys.
Minimal Trust Requirement: The only time you need to trust any Bitcoin software is when you send bitcoins. However, even then, you can exercise tight control over the process and independently verify the transaction to ensure there is no malicious activity. You can even create the addresses offline.
However, there are a few disadvantages to consider:
Management Complexity: Offline wallet storage requires more effort to manage compared to other wallet types.
Physical Security Risks: Paper wallets or unencrypted CD/USB wallets can be physically stolen, and even encrypted versions can be lost.
Lack of Comprehensive Software Solutions: There is no single software package that provides a complete solution for offline wallet storage. To create addresses and keys, options include bitaddress.org, blockchain.info, and vanitygen. To check your balance, you can manually review addresses on blockexplorer.com or use the read-only wallet functionality of blockchain.info or Armory.
To send bitcoins, there are two distinct steps: creating the transaction and then publishing it. To create a transaction, you can use offline wallet tools provided by blockchain.info, BTCurious's tool, or the Armory bitcoin client in offline mode. It is important to disconnect from the internet during this process. For added security, you can delete all data except the signed transaction afterwards. Once you have the transaction, you can push it onto the network by using tools like http://bitsend.rowit.co.uk.