What is a UTXO<\/h2>\n
A UTXO (unspent transaction output) is a specific amount of bitcoin available for the wallet owner to spend.<\/p>\n
It is akin to cash: you do not tear a $10 note in half; you hand over the full bill and get $5 in change. Unlike banknotes, however, UTXOs have no standard denominations and can hold any amount of BTC.<\/p>\n
New UTXOs are generated in the coinbase transaction that pays miners for finding a block, as well as when users send bitcoin.<\/p>\n
The set of all UTXOs at a given moment is called the UTXO set. Nodes track it to determine exactly how many coins exist and who can spend them. This prevents double spending on the first cryptocurrency\u2019s network.<\/p>\n
Why monitoring UTXOs matters<\/h2>\n
You do not need to manage UTXOs when storing bitcoin on an exchange \u2014 the venue handles that. On a non-custodial wallet, however, only you are responsible for your UTXOs.\u00a0<\/p>\n
With cash you decide which notes to use; with bitcoin you choose UTXOs.<\/p>\n
You may have spent bitcoin from non-custodial wallets without seeing UTXO selection before sending. Many developers automate input selection to improve the user experience.<\/p>\n
For those who want true control over their coins, some apps offer advanced UTXO management. In Ledger Live and Trezor Suite the feature is called Coin Control.<\/p>\n
Which UTXOs you spend affects:<\/p>\n
- \n
- fees. <\/strong>They depend on network activity and the number of UTXOs;<\/li>\n
- privacy. <\/strong>UTXOs can tip off outsiders about your wallet\u2019s overall balance and transaction history.<\/li>\n<\/ul>\n
UTXOs and fees<\/h2>\n
Your wallet stores data about every UTXO. If there are many, the network must process a large amount of data when you move bitcoin to a new address. That can lead to:<\/p>\n
- \n
- signing failures due to hardware-wallet limits;<\/li>\n
- high fees during periods of congestion.<\/li>\n<\/ul>\n
For example, the Coldcard Mk3 hardware wallet released in 2019 signs transactions up to 384 KB, while the 2022 Coldcard Mk4 handles up to 2 MB.<\/p>\n
Current hardware wallets from Trezor and Ledger process most transactions, but if you have a great many UTXOs, signing can take minutes or fail. In such cases it is best to send bitcoin in several smaller transactions rather than trying to sign all UTXOs at once.<\/p>\n
Investors who accumulate bitcoin via a DCA strategy often end up with lots of UTXOs. That can prove costly: they will pay many satoshis to move their coins.<\/p>\n
The fee depends on the price per byte of data and the transaction\u2019s size. Ten UTXOs contain more bytes than a transaction with two UTXOs.<\/p>\n
Most wallets let you set the price per byte. If you choose 1 sat\/vb (one satoshi per byte), you will pay the minimum. At 10 sat\/vb your cost is ten times higher.<\/p>\n
Why offer to pay more? It is not generosity; it is to ensure timely confirmation.<\/p>\n
The bitcoin protocol adds 1\u20132 MB of data to the blockchain roughly every ten minutes. Typically users send more data than that. Those who paid less wait in the queue for the next block: miners prioritise higher-fee transactions.<\/p>\n
With low network activity, low fees make sense. Otherwise miners may ignore the transaction until demand falls, or until you raise the fee using the Replace-By-Fee feature.<\/p>\n
To visualise varying network conditions, look at the mempool over the past two years.<\/p>\n
The mempool from January 2022 to January 2024. Data: mempool.space<\/a>.<\/figcaption><\/figure>\n The height of the coloured area shows how much data is awaiting processing. Colours denote feerates: pink \u2014 1\u20132 sat\/vb, green \u2014 10\u201312 sat\/vb, yellow \u2014 30\u201340 sat\/vb.<\/p>\n
In 2022 spikes faded within days. Miners relatively quickly included low-fee transactions.<\/p>\n
A year later the picture changed. The mempool grew on strong demand. Low-fee transactions went unprocessed for weeks. To speed confirmation, users chose ever-higher feerates.<\/p>\n
In congested periods you will pay more, and holding many UTXOs makes it worse.\u00a0<\/p>\n
Analysts at bitcoin company Unchained calculated that increasing the number of UTXOs from 5 to 100 can lift network fees by 20 times. Sending 1 BTC as 100 UTXOs at 100 sat\/vb costs roughly 2,000 times more than sending the same amount as 5 UTXOs at 1 sat\/vb.<\/p>\n
Approximate fee estimates for moving different volumes of UTXOs. Data: Unchained<\/a>.<\/figcaption><\/figure>\n Moving coins when fees are low is preferable, but not everyone knows when they will need to spend. With high feerates it is hard to predict how long it will take for fees to fall \u2014 demand may climb further.<\/p>\n
You cannot control network activity, but you can manage the number of UTXOs via consolidation and by moderating how often you fund your wallet.<\/p>\n
For example, with DCA you might transfer bitcoin to an external wallet once or twice a month, not daily or weekly. You would end up with fewer than 25 new UTXOs a year.\u00a0<\/p>\n
This approach means keeping part of your funds on an exchange. That adds risk, but if the bulk of your coins are already in cold storage, the compromise can be justified.<\/p>\n
If your wallet already holds many UTXOs, you can still lower future fees by consolidating \u2014 combining them on one address. Create a transaction with the UTXOs you want to merge and send them to a new address generated by your wallet.<\/p>\n
Say you have 10 UTXOs of 0.1 BTC. You can combine them and send to yourself. You will end up with a single UTXO. You will not have exactly 1 BTC, because you must pay a transaction fee.\u00a0<\/p>\n
So why consolidate if you must pay a fee \u2014 potentially a large one due to many UTXOs? You do it during periods of low demand to prepare for high fees, which are part and parcel of bull markets. Users often consolidate at weekends or use txfees.watch<\/a> to catch a \u201cdiscount\u201d.<\/p>\n
UTXOs and privacy<\/h2>\n
If anonymity matters, do not reuse an address for receiving bitcoin. That way you avoid revealing extra information about your transactions to third parties.<\/p>\n
\n
\u201cThe UTXO model provides a relatively high level of anonymity. You can interact with each UTXO separately, keeping them on unique addresses. <\/p>\n
- privacy. <\/strong>UTXOs can tip off outsiders about your wallet\u2019s overall balance and transaction history.<\/li>\n<\/ul>\n
![\"UTXO](\"https:\/\/lh7-eu.googleusercontent.com\/KMq_ZH_TzTAoXa3ia14NHHNa9HIlYvE2hMF4XWZQivNOO9Brfn_40i-EZxy30r3ZrurzcG_eVmt0co9_DOnoBzUmVfPhqn-CEBcmnEhzA3wfBXQYSz0vP8H0rHqkaUZY4Mar0lQF-tpE3gmkt3CTBoM\")
![\"UTXO](\"https:\/\/lh7-eu.googleusercontent.com\/umlNEJiH6kB_h_fZS1oTasngT-DvpyNOGZDl2OBNKG5ZKIbMARWwceaOscTDUy5s4vvNMAsQkn_5WhVBiFn99fyejbmpasT9Y4GpGQUcKlpoQO8THPoTZyuIOA70oZgLKgS8uRpu462wBOHLVs8GTqw\")