The foundation behind every Bitcoin transaction. Understand it to stay private and save on fees.
If you want to keep your bitcoin secure, you need to understand UTXOs.
You must know what they are, how to use them, and how managing them will transform your use of Bitcoin. This is especially important if you self-custody your bitcoin.
In this blog, we’ll introduce you to UTXOs and what you need to know about them to protect your bitcoin and stay secure.
(This applies to how all UTXO-based blockchains function.)
TL;DR — What is a UTXO?
- A UTXO (Unspent Transaction Output) is a specific amount of bitcoin your wallet controls and can spend. Your wallet can hold multiple UTXOs across different addresses. Together, they make up your total bitcoin balance. Each UTXO is like its own spendable piece of bitcoin.
- UTXO-based blockchains allow you to control how much information is shared to keep your total wallet balance private. It works more like physical cash than a bank account balance.
- Poor UTXO management can lead to higher transaction fees over time and might reveal your total bitcoin wallet balance and identity.
- If you care about on-chain privacy and keeping fees low, then understanding UTXOs is essential. It’s the perfect introduction to managing your bitcoin securely.
To put it simply, you’re just sending amounts of bitcoin and can use multiple addresses to make it a bit harder to see your full balance.
How it looks in Trezor Suite:
Want to watch a UTXO video explainer? Watch below:
Contents:
- Introduction
- An essential part of Bitcoin that you need to understand
- What is a UTXO?
- How are UTXOs created?
- Why should you care about UTXO management?
- Why you might be paying higher bitcoin transaction fees
- UTXO management best practices
- Key takeaways about managing your UTXOs securely
Let’s start by acknowledging that if you’ve already learned about Bitcoin and taken control of it by managing your private keys (using a hardware wallet), you deserve a pat on the back!
It’s not easy to understand, and you’re dealing with your money and future, so there’s an added stress level.
So it’s understandable that when you start hearing terms like:
Or UTXO, to name a few, you start getting a bit lost and overwhelmed.
The thing is, taking control of your bitcoin comes with responsibility. Part of that includes learning about essential things like UTXOs, so let’s begin!
If you put off learning about Bitcoin UTXOs today, it will affect your security and might cost you extra fees in the future.
An essential part of Bitcoin that you need to understand
Before you learn what a UTXO is, it’s important to understand these 4 things:
- All bitcoin transactions are public
- Anybody has the ability to see all transactions any address has made on the Bitcoin network
- Bitcoin addresses are long strings of characters that aren’t directly linked to your identity unless you’ve connected them.
- You can send funds to different addresses each time you receive bitcoin, which ensures that no single address reveals your entire balance. This makes it harder for others to monitor how much bitcoin you own.
Here are some reasons why your identity might be linked to a bitcoin address:
- Getting paid in bitcoin from your employer or client (who keeps records)
- Posting your address online for donations or tips
- Using your bitcoin address in transactions on regulated exchanges (KYC rules around collecting personal data)
- Transacting with someone you know personally
- Reusing the same address for multiple transactions (makes it easier to link patterns when combined with public data)
- Using third-party wallet services or custodial apps (these apps log your user data, so your address may be tied to your profile)
This will be important for understanding why managing your UTXOs matters!
What is a UTXO?
UTXOs = Unspent Transaction Outputs
This is a core part of the Bitcoin blockchain and how ownership is tracked.
A Bitcoin UTXO is a chunk of bitcoin that has been received in a transaction and is still available to spend.
Your wallet holds multiple UTXOs, and together, they make up your total bitcoin wallet balance.
When are UTXOs created?
- Every time you receive bitcoin, a new UTXO is created.
- When you send bitcoin, your wallet uses one or more UTXOs to create the transaction.
- Any amount left over is usually returned to your own wallet as a new UTXO (often via a change address).
“Wait, so UTXOs are just a fancy way to say ‘pieces of bitcoin’?!”
Kind of. But that’s not the whole picture.
“This sounds an awful lot like satoshis, the smallest unit of bitcoin, the currency…”
A UTXO is technically bitcoin, but it’s a specific piece of bitcoin that you own and can spend. Bitcoin doesn’t exist as a single balance in your wallet; it is multiple UTXOs that each represent a fixed amount of bitcoin from your previous transactions.
A UTXO might hold 12,000 satoshis or 2,000,000 satoshis.
Think of it like physical cash in your wallet:
- Each UTXO is like a bill ($ 1, $ 10, $ 20, $ 50, etc.).
- All these bills together are the total sum of your wallet.
- When you make a payment, you need to pick the right bills to send and get back the right amount of change.
Unlike cash, UTXOs can be set to any size. There are no restrictions on denominations.
How UTXOs are created, an example:
Let’s say Billy receives 0.5 BTC.
That 0.5 BTC is a UTXO that contains the bitcoin.
If Billy later sends 0.3 BTC to Sean, he creates two new UTXOs:
- Billy’s wallet uses the 0.5 BTC UTXO as the input
- His wallet sends 0.3 BTC to Sean (creates a new UTXO for Sean with the received amount minus the fees)
- It sends 0.2 BTC back to itself as ‘change’ (new UTXO for Billy)
Your wallet can have multiple addresses, each of which can hold multiple UTXOs. So, multiple UTXOs can be combined in one transaction, similar to how you might pay $ 50 in cash with smaller bills if you don’t have the exact amount.
“Why can’t bitcoin wallets have a total amount like my bank account? Why all this trouble with UTXOs?”
This might seem obvious at first glance. Your bank account has a total amount without all this UTXO business, so what’s the big deal?
Instead of using account balances like banks do, Bitcoin uses more discrete chunks of spendable bitcoin that make up your wallet. Basically, UTXOs give you greater control and a choice over your bitcoin and privacy.
UXTOs serve a very specific purpose for privacy-conscious users who want to organize their bitcoin and decide how their addresses are managed.
Controlling your bitcoin without an exchange involves some responsibility. UTXO-based blockchains let you control what information is revealed, helping you keep your total wallet balance private if you want.
This might take a little bit of work to get your head around, but it’s going to help you with Bitcoin security in the future! Here’s how:
Why should you care about UTXO management?
So we now know that UTXOs allow us to send and receive the correct amounts of bitcoin securely. Why should that matter to you?
Two main reasons:
- Your privacy
- The fees you pay
Let’s start with privacy.
Do you want everyone to know your bitcoin balance?
Imagine if every time you went and bought something, everyone knew your bank balance.
This is what poor UTXO management can lead to.
Here’s how:
Each UTXO is linked to an address. Reusing the same address or combining certain UTXOs can make it easy for someone to trace your transactions.
If someone knows that your identity is linked to one address, they can find out how much bitcoin you own and control… it’s like walking around with a sign on your head saying exactly how much money you have.
Do you remember what I said earlier about Bitcoin transactions?
You might be unwittingly telling everyone how much bitcoin your wallet has. And if someone connects your real-world identity to an address you use that contains UTXOs that reveal your full bitcoin wallet balance?…
People can find out exactly how much bitcoin you own.
It’s bad enough that people might know this information today, but given Bitcoin’s historical price performance (Bitcoin reached a $ 1 trillion market value faster than any other asset), would you feel comfortable with people knowing how much you own in say, 10 years? Probably not. It could be dangerous.
“I kind of get it, but how does this work in practice?”
Let’s say someone sends you 2 BTC. You now have one UTXO worth 2 BTC in your bitcoin wallet.
Now you receive 0.1 BTC from someone else in another transaction. You probably don’t want them to know that you have 2 BTC in your wallet, right?
So you generate a new address and receive the 0.1 BTC there.
So your total wallet balance is 2.1 BTC, made up of two UTXOs in two addresses (one with 0.1 BTC and one with 2 BTC).
You can control how much information is shared in each transaction with these two addresses. And if you were to combine these UTXOs above into one address? Well, your total wallet value is now visible to anyone involved in both transactions.
That person now knows you hold 2.1 BTC, and possibly your identity, depending on whether the addresses are linked to who you are.
As if that’s not enough reason to learn about UTXOs, not paying attention to this can also cost you bitcoin (literally). Here’s why:
Why you might be paying higher bitcoin fees
The size of a bitcoin transaction fee depends on the number of UTXOs involved because Bitcoin’s fee structure is based on data.
When you send a transaction, you send data to miners, who validate it for a fee.
More UTXOs = more data = more fees (especially if the network is busy)
Sending a single UTXO will not be expensive, but sending a transaction with many UTXOs will cost more because of the larger data size (even if the amount is the same).
Sending 1 BTC using one UTXO = cheaper fee
Sending 1 BTC using ten UTOXs = more expensive fee
So now we know that managing your UTXOs is important for protecting your privacy and avoiding higher fees, what can you do about it? Read below to learn:
UTXO management best practices
You might be wondering if this is even a problem for you right now, and honestly, it depends on your situation. The fact is that it does effect everyone, so you need to be aware. Still, if you’ve received a large amount of UTXOs (for example, if you buy a small amount of bitcoin regularly and spend a lot of bitcoin), you should start considering taking steps to manage your UTXOs sooner rather than later. Since the bitcoin you own today may be worth far more in the future, it’s better to be cautious.
Now that we know that managing these UTXOs is essential, wouldn’t it be great if you could organize them? Yes!
Let’s introduce the concept of UTXO consolidation: the process of combining smaller UTXOs into one larger UTXO by sending a transaction to yourself. This will help reduce fees and simplify your future transactions.
How to securely consolidate your UTXOs
You would usually only want to consolidate UTXOs from the same source (for example, keeping business payments separate from personal savings). This way, you can maintain your privacy while managing your UTXOs efficiently and saving on future fees.
*It’s usually recommended to avoid combining all your funds into a single UTXO*
How do you do this?
First, wait until bitcoin fees are quite low. Then, select which UTXOs you want to combine and send them to yourself, creating a new, single UTXO. This is easy to do in Trezor Suite.
So in practice, you can consolidate UTXOs selectively, maintain your privacy, and avoid higher fees.
Important: If you’re not careful, UTXO consolidation comes with a privacy risk. Although it will reduce future fees, if you merge UTXOs linked to different addresses, you could end up revealing your total wallet balance on the blockchain.
Here’s an example of how UTXO consolidation could lead to your bitcoin balance being revealed:
Billy buys bitcoin monthly, and each time it’s sent to a different address.
He also receives regular bitcoin payments for freelance work he does to the same wallet.
Billy’s wallet contains UTXOs that aren’t linked, so his overall wallet balance remains private, but all these UTXOs will result in higher transaction fees. So Billy decides to consolidate his bitcoin by sending it all to his wallet, creating a new, single UTXO.
By combining and consolidating all these UTXOs at once, Billy is revealing his entire bitcoin wallet balance to the blockchain. Both the exchange that he was buying bitcoin from and anyone who was paying him in BTC can now see his total wallet balance!
*This is irreversible*
Once you do this, it cannot be reversed. If your holdings become publicly known, this could lead to future security issues.
How it looks in Trezor Suite:
Want to manage your UTXOs with Trezor Suite?
In Trezor Suite you can use our Coin Control feature to select which UTXOs you want to consolidate and send. You can also label them for easy identification.
If you have many transactions spread across multiple wallets, it’s important to understand how Coin Control works.
Watch the video below to learn more about managing UTXOs in Trezor Suite:
What’s next? Key takeaways about managing your UTXOs securely:
Becoming aware of why UTXOs matter is a big step towards staying secure. From here, you can now start considering UTXOs when you send bitcoin. It’ll become clearer once you start actively managing them.
Key takeaways:
- You’re just sending amounts of bitcoin and can use multiple addresses to make it a bit harder to see what your full balance is.
- Managing your UTXOs is crucial for maintaining your privacy and avoiding high transaction fees.
- Regularly sending small amounts of bitcoin to self-custody might lead to extremely high fees when you need to send this bitcoin in the future. Aiming to keep UTXOs above 0.01 BTC can be helpful for managing your UTXOs (if sending bitcoin from an exchange, consider sending larger amounts at once).
- Always consider the risks before consolidating any coins. This isn’t reversible.
- Be careful about combining UTXOs that could reveal your full wallet balance.
- Be aware of linking your real identity to a bitcoin address, and manage those addresses carefully.
Ready to manage your UTXOs?
Use Coin Control in Trezor Suite to review, consolidate, or manage your UTXOs while preserving your privacy.
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Interested in learning more? Continue with:
- What is a UTXO? (more detailed, technical explanation in our Knowledge Base)
- How a bitcoin transaction works
- Coin Control in Trezor Suite
- What is a change address?
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What Is a UTXO? The Key to Bitcoin Privacy and Lower Fees was originally published in Trezor Blog on Medium, where people are continuing the conversation by highlighting and responding to this story.
