Save Money with UTXO Management
What is an UTXO?
UTXO stands for Unspent Transaction Output. It can be seen as a digital coin in your Bitcoin wallet. Imagine you buy an ice cream that costs 4,70€. You pay with two 2€ coins and one 1€ coin (Output). You get back a 20 cent and a 10cent coin change (New created Input).
For a bitcoin, it is just as simple. Imagine you have 0,00016331 BTC in your wallet and then you pay 0,00006 BTC. You would, then, receive 0,00007221 BTC as a change.
How are UTXOs created?
They can be created in three different ways:
- Receiving Bitcoin (Input)
- Spending Bitcoin (Output)
- Receiving change from a Bitcoin transaction (New Input)
Input: What you receive
When someone sends you Bitcoin, for example when you buy Bitcoin on Bittr or you get paid for a service in Bitcoin.
Each time you receive Bitcoin, a new UTXO is created.
Output: What you send
When you want to buy something or send Bitcoin to someone else, you have to use one or more of your existing UTXOs. It’s like taking coins out of your wallet to give to someone else.
New Input: The change you get
Most of the time when you pay something with cash, you don’t have the exact amount of coins to pay the seller. In return we get a change. The same concept applies for Bitcoin: In Bitcoin, this change is a new UTXO in your wallet.
The difference to cash is that Bitcoin doesn’t have standard denomination sizes like cash. Where you have 5€, 10€ and 20€ bills in cash, a Bitcoin UTXO can have any size and therefore is unique.
Why does it matter to you?
—> It is key to determine the fees you pay
The number of UTXOs participating in a transaction determines the transaction cost for you. The size of a transaction is influenced by the number of Input UTXOs (the ones spent) and the number of Output UTXOs (the new ones created in the transaction).
The larger the transaction, the higher the fees:
When you send a transaction, the amount of inputs needed for a transaction is determined by the types of transactions you’ve received before. Just like with physical cash, if you’ve only received 5€ bills and want to buy something worth 50€, you’ll need to use ten 5€ bills for that purchase, while if would have received one 50€ bill before, you would only need to spend this one bill.
With cash the amounts of inputs (ten 5€ bills) don’t increase the fee of the transaction, while in Bitcoin you have to pay higher fees for the transaction with 10 inputs than for the transaction with only one input.
UTXO Consolidation: How to save money and pay less fees
If you stack sats in a regular interval, such as a weekly or even daily you might end up with a lot of small inputs in your Piggy Bank. This not only results in higher transaction fees when receiving these purchases but also in the future when using these UTXOs for sending transactions.
To consolidate your UTXOs, you simply have to send a transaction to yourself. This transaction takes all the small inputs and creates one bigger output.
Privacy
Sometimes, for privacy reasons, it’s better not to combine certain UTXOs. Every person who sent you Bitcoin knows the related transaction and UTXO. When you consolidate UTXOs, you link this information together — which could unintentionally reveal insights about your holdings.
So think carefully about:
- who you received Bitcoin from, and
- who might infer your holdings when you merge UTXOs. UTXOs acquired via Bittr can be consolidated without worries — no third parties are involved.
Final Thoughts
- UTXOs are like digital coins created when receiving, sending, or as change.
- More UTXOs = higher fees: many small UTXOs make a transaction larger and more expensive.
- Consolidation saves money but can cost privacy.