UTXO Management 101

How it will save you thousands of dollars in the future

💡 Daily Reminder: Stay humble, stack sats

Bitcoiners,

Are you a Bitcoin Hodlr? (slang for Holder)

As in, you may be buying bitcoin now with no plans to sell until far into the future.

Well, that may be a costly mistake.

Especially if you are taking custody of your assets in a personal wallet, it might cost you thousands of dollars to send the bitcoin you have been accumulating over the years when you’re ready to finally spend it.

Here’s why every Bitcoin buyer should understand UTXO management and how you can save hundreds of thousands of dollars in the future by taking action in today’s low-fee environments.

What are UTXOs?

Unspent Transaction Outputs (UTXO) are any fraction of a bitcoin that has not been spent.

Every time you transact with Bitcoin, you provide a Bitcoin address or send to someone else’s Bitcoin address that each contains one or more sets of Unspent Transaction Outputs (UTXO). As an example, consider you have 5 bitcoin in a wallet containing one UTXO input and you would like to pay a cashier 1 bitcoin for an item. Using the graphic below, the transaction will result in (3) separate UTXO outputs where the cashier gets a 1 btc UTXO output, you receive a 3.9 btc UTXO output in your wallet as change, and miners collect a small 0.1 btc UTXO output fee for facilitating the transaction.

UTXOs are constantly created on the Bitcoin network as bitcoin is transacted and the protocol tracks it all to make sure nobody is double-spending the bitcoin in their wallet.

Why Does it Matter to Me?

The amount of UTXOs you use as inputs in a transaction directly affects how much you will be paying in mining fees.

If you are buying bitcoin on an exchange and sending it to a personal wallet regularly, you may accumulate hundreds of addresses containing thousands of UTXOs over a long enough time period. These thousands of UTXOs contain large data sets. The larger the UTXO data set is in a transaction, the more miners will charge you in fees.

In a high-fee environment in the future where miners are charging 100 sats/vb for transactions, you would have to pay a 0.2 bitcoin fee to spend 1,000 UTXOs in a single transaction.

Transaction fees paid in dollars at different Bitcoin prices

UTXO Management

As the price of bitcoin appreciates, miner transaction fees will become increasingly costly to the tune of hundreds of thousands of dollars if you do not properly manage your UTXOs today.

Luckily, there are solutions that exist today to help you consolidate your UTXOs so you can minimize miner fees in the future. One solution is to manage your own UTXOs via wallet software such as Sparrow Wallet. Another solution is to use a reputable third-party service such as Unchained to partially or fully manage your UTXOs for you.

Whatever method you choose to manage your UTXOs, it’s important that you start today as we are currently in a low-fee environment where it is as cheap as possible to do so.

Happy Wednesday,

-Pod

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Eric Podwojski

Co-Founder, Bitcoin Talent Co.

www.BitcoinTalent.co

Twitter: @epodrulz

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Disclaimer: This should go without saying: This is not financial advice. This is not investment advice. I write this newsletter for education and entertainment. Act accordingly.