UTXOs, aka Unspent Transaction Outputs, are used to verify how much Bitcoin is locked to each address because your coins are stored on the blockchain, not in your wallet.\u00a0\u00a0<\/p>\n
The Bitcoin Blockchain is a ledger database that references the quantity of Bitcoin assigned to UTXOs rather than accounts or balances like traditional banking.\u00a0\u00a0<\/p>\n
No one owns Bitcoin.\u00a0\u00a0<\/p>\n
The anonymity of Bitcoin exists because the blockchain does not care about individual ownership.\u00a0<\/p>\n
The Bitcoin network is both transparent and pseudonymous at the same time.\u00a0 Anyone with a computer can verify the existence of every transaction and the current value of every wallet address on the network.<\/p>\n
An individual user has control of their Public Key and Private key which lock and unlock Bitcoin they received, but they don\u2019t actually own Bitcoin.\u00a0\u00a0<\/p>\n
You custody your private keys, like passwords, that control addresses which have received Bitcoin<\/p>\n
All transactions on the Bitcoin network start by spending OUTPUTS from previous transactions (except miner block rewards called \u2018coinbase\u2019).\u00a0<\/p>\n
The output of a transaction is called an Unspent Transaction Output (UTXO<\/strong>) which has an assigned amount of Bitcoin (BTC) which can be spent in the future.\u00a0\u00a0<\/p>\n Each UTXO (Bitcoin) has two attributes associated with it \u2013 the date\/time when the coin was created (age) and the price at its creation point (realized price).<\/p>\n Different blockchain protocols use different accounting models to track and manage address balances to prevent double spending.\u00a0\u00a0<\/p>\n Account\/Balance Model: Balances tracked and maintained in real time for each user using credits\/debits similar to your bank. (Ethereum Blockchain)<\/p>\n Unspent Transaction Model: Wallet balance is the total sum of the UTXOs assigned to a user\u2019s public address that were recorded to the blockchain and remain unspent (Bitcoin).<\/p>\n The first step in the transaction process is for your wallet to scan the entire blockchain identifying any UTXOs assigned to your public address.\u00a0 An open source LevelDB<\/strong> database, created by Google in 2011, is used for storing and indexing the metadata for ALL UTXOs (UTXO set<\/a>).\u00a0\u00a0<\/p>\n The UTXOs assigned to a wallet address are secured by a cryptographic key pair<\/strong> (randomly generated letters and numbers). \u00a0 Public keys<\/strong> (like an email address or Venmo handle) and private keys<\/strong> (like a password) are used to sign (authenticate) transactions which spend UTXOs on the Bitcoin network.\u00a0\u00a0<\/p>\n Public key<\/strong>: public key used to encrypt (lock) a UTXO to the recipient.\u00a0\u00a0\u00a0\u00a0<\/p>\n Private key<\/strong>: Unique key, like a password, that signs and decrypts (unlocks) a UTXO to be spent in a transaction.\u00a0\u00a0\u00a0<\/p>\n Public Address: <\/strong>\u00a0A Bitcoin Address is the public source or the destination of an amount of Bitcoin (UTXO) that is being spent or received.<\/p>\n For example, when you exchange your dollars (fiat) your wallet address is assigned a UTXO with a fixed amount of Bitcoin based on the BTC:USD exchange rate.<\/p>\n For the Tradfi nerds out there, it\u2019s like double-entry accounting where each transaction has an input and an output.\u00a0 Unspent outputs are recorded to a database, called the blockchain, and can be used (spent) in a future transaction.\u00a0<\/p>\n The amount of BTC your address receives (as little as 0.00000001 BTC) is considered \u2018unspent\u2019.\u00a0 Your wallet adds up all of the UTXOs assigned to your address(es) to display your Bitcoin balance.\u00a0\u00a0<\/p>\n Banks have \u2018account holders<\/strong>\u2019 who make deposits and withdraw money from \u2018accounts<\/strong>\u2019.\u00a0 Banks manage an internal credit and debit ledger to keep a record of the \u2018account balance\u2019 acting as a custodian for the account holder\u2019s assets.\u00a0\u00a0\u00a0<\/p>\n Banks are only required to keep 10% of your deposits.\u00a0 The other 90% can be used to fund the bank\u2019s payroll or make loans to their other customers.\u00a0 Remember 2008?<\/strong><\/p>\n Bitcoin has \u2018wallet addresses<\/strong>\u2019 which contain \u2018UTXOs<\/strong>\u2019 (credits) verified by an immutable public ledger (blockchain<\/strong>).\u00a0<\/p>\n In real life, money is something you give to someone else in exchange for a good or service.\u00a0<\/p>\n You transact with another person or business by exchanging physical (paper\/coin) money or digital money (Zelle\/PayPal).<\/p>\n Physical Money \u2013 <\/strong>The paper bills or coins in your pocket with fixed denominations.\u00a0\u00a0<\/p>\n Transacting with a merchant using physical money<\/strong> typically results in the merchant handing you back change representing the difference between the total amount due and the total amount of paper or coin money you handed to the cashier.\u00a0\u00a0<\/p>\n For example, let\u2019s say you walk into a pizza shop to grab a couple slices and a drink for $6.50.\u00a0 You reach into your wallet, grab a $20 bill and hand it over.\u00a0 The cashier places the $20 in the drawer and hands back paper notes + coins equalling your change of $13.50.\u00a0\u00a0<\/p>\n Digital Money<\/strong> \u2013 A number on a screen that reflects your account balance with your bank or payment app.\u00a0\u00a0<\/p>\n Transacting with a merchant using digital money<\/strong> is more precise.\u00a0 There is no change given as the exact total amount due is transferred from your bank account through a payment processing network which settles the transaction by transferring funds to the merchant.\u00a0\u00a0<\/p>\n For example, let\u2019s assume you have $10,000 in your bank checking account.\u00a0 If you use your bank debit card at a restaurant to pay for a $50 dinner for two, your bank doesn\u2019t send the restaurant $10,000 expecting to get $9,950 in change credited to your account.\u00a0\u00a0<\/p>\n The exact amount of $50 is deducted from your account, routed through the payment processing network eventually making it back to the restaurant.\u00a0\u00a0<\/p>\n Bitcoin is digital money<\/strong>.\u00a0 It\u2019s just numbers on a screen that move around on a network transferring value from one address to another.<\/strong><\/p>\n These transfers function <\/strong>more like physical money <\/strong>less like digital payments<\/strong> (credit\/debit\/ACH) because the sender typically receives \u2018change\u2019 back as the output of a transaction.\u00a0<\/p>\n Transaction: <\/strong>Bitcoin Core Software uses code, called Script, which tells the network 1) amount an address is \u2018spending\u2019 (sending to the recipient), 2) whether the sender address (wallet) has enough funds to spend, 3) which address (wallet) will receive the amount and 4) how much change to send back to the sender\/spender after mining fees are paid.\u00a0\u00a0\u00a0\u00a0<\/p>\n Input:\u00a0 <\/strong>The value that is spent.\u00a0 A transaction input includes information pointing to a transaction that created the UTXO and the unlocking script the sender uses to prove ownership.<\/p>\n Output: <\/strong>The value that the recipient receives AND the change due to the spender.\u00a0 Outputs contain a locking script (scriptSig) which must be unlocked (scriptPubKey) to spend in future.<\/p>\n UTXO: <\/strong>An Unspent Transaction Output (UTXO<\/strong>) is used as an input<\/strong> in a transaction.\u00a0 The transaction creates a minimum of two outputs.\u00a0 <\/strong>The recipient receives one (1) UTXO and the sender receives their \u2018change\u2019 as one (1) UTXO.\u00a0 Both UTXOs can be used as inputs in future transactions by either party.\u00a0\u00a0<\/p>\n Transaction Fees<\/strong>: Transaction (txn) Fees, also known as Network Fees, are paid to miners as an incentive to be included in the next block on the Blockchain.\u00a0 Fees are calculated based on the data size of a transaction not the dollar amount.\u00a0 The size of each input UTXO, expressed in vBytes, is multiplied by a variable network rate, expressed in fractional Bitcoin (called satoshis) per vByte.\u00a0\u00a0<\/p>\n Blockchain<\/strong>: The Bitcoin Blockchain is a distributed ledger of ALL Bitcoin (digital currency) transactions processed on the decentralized Bitcoin Network.\u00a0 Bitcoin Blockchain and Bitcoin Network are often used synonymously but they are two different components of Bitcoin.\u00a0\u00a0<\/p>\n Network: <\/strong>The Bitcoin Network is a peer-to-peer (P2P) network of computers (nodes) who run the same Bitcoin Core software protocol.\u00a0 These nodes communicate across the network to achieve consensus while performing specific tasks like routing, mining (validation), database management, and wallet services.\u00a0<\/p>\n Wallet: <\/strong>A hardware device or software specifically designed to store your key pair(s) <\/strong>and create transactions which get broadcasted to the Network and added to the Blockchain once validated by miners.\u00a0\u00a0<\/p>\n When you log into your exchange account or wallet to create a transaction, you\u2019ll need to enter a few key pieces of information like:<\/p>\n Recipient\u2019s address (where to send)<\/p>\n The amount of BTC (how much to send)<\/p>\n The network fee\/priority<\/a> (High, Medium, Low or No Priority).<\/p>\n When you click send or confirm, your wallet creates a transaction which is really just a message that gets broadcasted to the network and validated by nodes. \u00a0 The first step in creating a new transaction is for your wallet to select a transaction<\/strong> (input)<\/strong> which will be spent\/sent to the receiving address.\u00a0<\/p>\n Once the message is created, your wallet signs the message<\/strong> (cryptographic signature) with his private key<\/strong> and broadcasts the message <\/strong>to the network for validation <\/strong>(miners who charge network fee.)\u00a0\u00a0<\/p>\n The message <\/strong>contains a transaction structure<\/strong> and is automatically created by your wallet:<\/p>\n Inputs<\/strong> \u2013 How many UTXOs required from the sender to complete the payment<\/p>\n Amount <\/strong>\u2013 How much Bitcoin is being sent to the recipient<\/p>\n Outputs <\/strong>\u2013 The number of\u00a0 UTXOs,\u00a0 their value expressed in satoshis (fractions of BTC), and the destination address for each (recipient UTXO and change UTXO)<\/p>\n Lock time<\/strong> \u2013 Optional property of a transaction that states the earliest time and date that the transaction is eligible to be broadcast.\u00a0\u00a0<\/p>\n Once the transaction is confirmed <\/strong>by the miner, it\u2019s added to the block<\/strong> and will be stored forever on the blockchain<\/strong><\/a> (public ledger) which is maintained by distributed nodes <\/strong>which host and synchronize a publicly available copy of the every transaction included on Bitcoin blockchain since it\u2019s inception on January 3, 2009.\u00a0\u00a0\u00a0<\/p>\n You don\u2019t need to know all of the technical details.\u00a0 We cover how Bitcoin transactions<\/strong> function<\/strong><\/a>, calculating Bitcoin transaction fees<\/a><\/strong> and decoding Bitcoin transactions<\/a><\/strong> in detail on other posts.\u00a0\u00a0<\/p>\n This may sound like a lot of moving parts but there are a lot fewer components compared to an average credit card transaction involving 8 parties<\/a>.\u00a0 Each middleman takes their cut including the acquiring bank (merchant\u2019s bank), issuing bank (cardholder\u2019s bank), card networks (visa, mastercard), credit card processor, independent sales organizations (ISO), membership service provider (MSP), integrated software vendors (ISV) and payment gateways (authorize.net).\u00a0\u00a0<\/p>\n Bitcoin is the world\u2019s first perfectly engineered digital money.<\/p>\n Going back to our pizza example using a rough<\/em> real world example\u2026\u00a0\u00a0<\/p>\n The $20 bill that you spent for a $6.50 pizza and drink becomes one (1) $20 UTXO for the pizza shop once they place the $20 in their cash drawer.\u00a0\u00a0<\/p>\n The US Government issues legal tender in fixed denominations.\u00a0 The $13.50 you\u2019re due from the pizza shop as change needs to be split up using a combination of notes and coins.<\/p>\n In Bitcoin terms, 6 UTXOs are used as outputs to complete this pizza transaction: one (1) $10 bill, three (3) $1 bills, and two (2) quarters (2 x $0.25 coins).\u00a0\u00a0<\/p>\n You can spend your $13.50 and the pizza shop can spend their $20 for future transactions.\u00a0<\/p>\n If this transaction took place on the Bitcoin Network, you spend one (1) $20 value UTXO as an input.\u00a0 After transaction confirmation, the pizza shop receives one (1) $6.50 UTXO and you receive one (1) $13.50 UTXO as change from the transaction.\u00a0\u00a0<\/p>\n In this transaction example, your $20 input UTXO is destroyed, or consumed and marked unspendable.\u00a0\u00a0<\/p>\n The two (2) brand new UTXOs created as outputs can be spent (or combined with other UTXOs) for future transactions by each respective party.\u00a0\u00a0\u00a0<\/p>\n These outputs are based on the spot price<\/strong> of Bitcoin to US Dollars at the time of the transaction and the UTXO is expressed in fractions of Bitcoin, called satoshis.\u00a0\u00a0<\/p>\n Your Bitcoin wallet now has a balance of 0.00052117 BTC (~$22.44) made up of 3 UTXOs assigned to your address with one of them being from the pizza shop transaction:<\/p>\n 0.00011582 BTC (~$5)<\/p>\n 0.00008805 BTC (~$3.80)<\/p>\n 0.00031270 BTC ($13.50 change from pizza)<\/p>\n Friday rolls around and you want to take a friend for pizza and pay using Bitcoin.\u00a0\u00a0<\/p>\n Your wallet will locate your 3 available UTXOs to find a combination that\u2019s greater than or equal to the $13 (0.00030166 BTC) to settle your new pizza transaction.\u00a0\u00a0<\/p>\n Even though you have a UTXO with ~$13.50, it\u2019s not enough to cover the transaction fees.<\/p>\n Based on your UTXO amounts, we\u2019ll need to use all 3 UTXOs to cover the cost + transaction fees which are assessed for each UTXO.\u00a0\u00a0<\/p>\n Assuming the average UTXO size is 250vBytes for a P2PKH transaction with 1 input + 2 outputs.\u00a0 We\u2019re using 3 UTXOs as inputs for this transaction.\u00a0 Each input P2PKH <\/strong>UTXO is 148 vBytes compared to 68 vBytes for P2WPKH<\/strong><\/a>.\u00a0 Try for yourself on this transaction size calculator<\/a> or this calculator<\/a>.\u00a0<\/p>\n Pro Tip: <\/strong>Bech32 Native Segwit (P2WPKH)<\/strong> input UTXOs are less than half the size of P2PKH <\/strong>input UTXOs due to the signature and pubKey being moved from the scriptSig to witness.<\/p>\n In our example with 3 inputs and 2 outputs, the total transaction size is 546vBytes (250 + 148 input 2<\/em> + 148 input 3<\/em>).\u00a0 If the network fee is 25 sats\/vByte, it will cost 13,650 sats (546vBytes x 25 sats\/vByte) equivalent to ~$5.50 in network fees (0.00013650 BTC X $40,000 BTC:USD).<\/p>\n We need to use 3 UTXOs as inputs, worth ~$22.50, because we don\u2019t have one single UTXO with enough Bitcoin to cover the (pizza) cost plus network fees.\u00a0\u00a0<\/p>\n UTXO 1:<\/p>\n Fee: 0.00006250 BTC ($2.70)<\/p>\n Spendable: 0.00005332 BTC (~$2.30)<\/p>\n Change: None<\/p>\n UTXO 2:<\/p>\n Fee: 0.00006250 BTC ($2.70)<\/p>\n Spendable: 0.00002555 BTC (~$1.10)<\/p>\n Change: None<\/p>\n UTXO 3:<\/p>\n Fee: 0.00006250 BTC ($2.70)<\/p>\n Spendable: 0.0002502 BTC ($10.80)<\/p>\n Change*: 0.00002784 BTC UTXO worth ~$1.20<\/p>\n I\u2019ll receive one change UTXO of 0.00002784 BTC worth ~$1.20 back as change after paying for the pizza and network transaction fees.\u00a0<\/p>\n There\u2019s a problem.\u00a0 Given the current fee environment<\/strong>, it will cost me ~$2.70 in fees to spend a UTXO worth ~$1.20.\u00a0 This UTXO is called \u2018dust\u2019.\u00a0 Bitcoin dust is unspendable and the next topic we\u2019ll cover below.\u00a0\u00a0<\/p>\n Bitcoin Dust is a UTXO with a tiny amount of Bitcoin leftover from a transaction.\u00a0<\/p>\n Because Bitcoin is divisible into 100 million units, called \u2018sats\u2019 or satoshis, dust UTXOs can vary in size relative to dust limits.\u00a0\u00a0<\/p>\n Dust limits<\/strong> are equal to the minimum trade buy\/sell limit to transact on the network.\u00a0 When you create a transaction, a minimum limit is displayed.\u00a0\u00a0<\/p>\n The smallest quantity of Bitcoin you can have locked to your address is 0.00000001 BTC (1 sat), currently worth about $0.00043 USD.<\/p>\n Dust UTXOs are unspendable and can range from 1 sat up to the current network cost to spend that UTXO in a transaction.\u00a0\u00a0<\/p>\n For example, if the network rate is 30 sats\/vByte and a transaction is ~250 vBytes then the minimum cost to get your transaction picked up by a miner is (250 x 30) = 9,000 sats (0.00009 BTC) worth ~$3.75 at a $43,000 BTC:USD spot price.<\/p>\n Bitcoin dust is inevitable if you transact with Bitcoin or move funds to different addresses for privacy or consolidation.\u00a0 It\u2019s a problem and there are solutions to cleanup or dust off.<\/p>\n Not all dust UTXOs are leftover change from a transaction.\u00a0 Marketers use dusting to promote crypto projects and hackers use crypto dusting as a tactic too. Learn how to prevent Bitcoin dusting attacks<\/a> to protect your privacy and security.<\/p>\n Here are the most common Bitcoin dust cleanup methods:<\/p>\n If your wallet provides a \u2018dust cleanup\u2019 option, start by investigating this.\u00a0 Hierarchical Deterministic HD Wallet coin consolidation <\/strong>is manual or an automatic function depending on the provider.<\/p>\n Use Coin Control in your wallet, if available, to manually select dust UTXOs to use as inputs in the transaction.\u00a0 Each transaction input UTXO is 148 vBytes of data using PSPKH (~68 vBytes using P2WPK thanks to \u2018witness\u2019).\u00a0 Let\u2019s look at transaction sizes for an example of a P2PKH input and P2PKH output(s).<\/p>\n 1 input \u2013 2 outputs: 226 vBytes\u00a0<\/p>\n 2 inputs \u2013 2 outputs: 374 vBytes\u00a0<\/p>\n 5 inputs \u2013 2 outputs: 818 vBytes\u00a0<\/p>\n 10 inputs \u2013 2 outputs: 1,558 vBytes\u00a0<\/p>\n Waiting for a low fee environment to consolidate all of your dust UTXOs in a single self-spend transaction is a common practice.<\/p>\n Your exchange or wallet provider may offer to \u2018swap\u2019 your Bitcoin dust for a native token or another coin.\u00a0 Binance offers Bitcoin dust to BNB<\/a> and Crypto.com has a dust conversion option<\/a>.<\/p>\n \u2018Dusting Off\u2019 your \u2018dust\u2019 address is different from consolidating.\u00a0 You\u2019re basically sending another Bitcoin UTXO to the address making the address usable again.\u00a0 You\u2019ll pay transaction fees to dust off and then again when you transact from this address.<\/p>\n There\u2019s no simple fix for Bitcoin dust but there is hope for the future.\u00a0<\/p>\n If the price of Bitcoin increases at a higher rate than network fees, today\u2019s dust could be tomorrow\u2019s windfall.\u00a0\u00a0<\/p>\n Over time, the combined dust UTXOs on the network could effectively remove a significant amount of total supply on the market which could contribute to price pressure moving up as long as network fees don\u2019t increase at a correlated rate to the price of Bitcoin.<\/p>\n If network fees increase dramatically, the future cost to consolidate Bitcoin dust will increase and playing the waiting game may not be the most advantageous strategy.\u00a0\u00a0<\/p>\n You\u2019ll need to develop your strategy by personal thresholds.\u00a0 In order to do this, you must understand the marginal cost to transact with multiple Bitcoin UTXOs.\u00a0\u00a0<\/p>\n The Bitcoin Network is unique in that the cost to transact is based on the (data) size of the inputs, not the dollar amount transacted.\u00a0\u00a0<\/p>\n The more input UTXOs used in a transaction, the more it costs a miner to store, process and validate due to increased electricity consumption.\u00a0<\/p>\n Figuring out the cost to move (spend\/transact) a UTXO compared to the actual value of the UTXO is simple math that is often overlooked.\u00a0\u00a0<\/p>\n An \u2018input\u2019 UTXO in a transaction is valued as the amount in BTC multiplied by the network fee paid to the miners measured in sats\/vByte (we\u2019ll cover this in a minute).\u00a0 Note that if the transaction originates from an exchange, there may be an additional transaction fee represented as a fixed amount (ie \u2013 $0.99 or a % of value).<\/p>\n Example 1: Assuming BTC-USD spot price is $40,000\u2026<\/p>\n 0.0002 BTC UTXO is = $8\u00a0\u00a0<\/p>\n Miner Fee (100 sat\/vByte) = $6<\/p>\n This $8 value UTXO will cost $6 to spend in a transaction netting $2 in value (0.00005 BTC) output UTXO created.\u00a0 That UTXO is locked to the recipient\u2019s address and is considered \u2018spendable\u2019 to be used as an input in a future transaction.\u00a0\u00a0<\/p>\n Bitcoin UTXOs that have a marginal cost which exceeds the value are considered \u2018dust\u2019.\u00a0<\/p>\n Assuming ~$40,000 BTC-USD and current fee rate of 100 sat\/vByte any UTXOs of less than 0.00025 BTC are considered dust.\u00a0 Another way of looking at this is taking our average single-sig 1 input : 2 output UTXO size of 245 vBytes we can calculate the following Dust minimum like this:\u00a0<\/p>\n 1 sat\/vByte fee: 245 sat min (0.00000245 BTC) UTXO<\/p>\n 5 sat\/vByte fee: 1225 sat min (0.00001225 BTC) UTXO<\/p>\n 20 sat\/vByte fee: 4,900 sat min (0.000049 BTC) UTXO<\/p>\n 50 sat\/vByte fee: 12,250 sat min (0.00012 BTC) UTXO<\/p>\n 100 sat\/vbyte fee: 24,500 sat min (0.00025 BTC) UTXO<\/p>\n 150 sat\/vbyte fee: 36,750 sat min (0.00036750 BTC) UTXO<\/p>\n Bitcoin dust cannot be spent and you may see an error in your wallet UI when creating a transaction using dust due to the paper value not being equal to the marginal cost of the transaction value on settlement.\u00a0<\/p>\n A \u2018Dust UTXO<\/strong>\u2019 may only become spendable if\/when network fees lower or the spot price increases.\u00a0 Bitcoin has an enforced lower limits which most (wallet) developers hard coded into their software to prevent transactions:<\/p>\n P2PKH addresses (starting with \u20181\u2019): Minimum UTXO size of 546 satoshis<\/a>.<\/p>\n P2SH-P2WPKH addresses (starting with \u20183\u2019): Minimum UTXO size of 540 satoshis.<\/p>\n P2WPKH addresses (starting with \u2018bc1q\u2019): Minimum UTXO size of 294 satoshis.<\/p>\n P2TR addresses (starting with \u2018bc1p\u2019): Minimum UTXO size of 330 satoshis.<\/p>\n When your best case scenario is to wait for fees to drop significantly or wait for the price of Bitcoin to increase, a risky situation is created since a rise in price is often related to supply constraints due to increased network activity competing for the limited block space.<\/p>\n We can forecast dust thresholds <\/strong>in a rising fee environment to identify scenarios where the cost to transact (move\/spend) a small UTXO is = 100% of its value.\u00a0\u00a0<\/p>\n Even if the UTXO is worth something, <\/em>losing 90% of the value to fees is ludicrous.\u00a0\u00a0<\/p>\n Using round numbers for this example an average 250vByte transaction (single-sig PSPKH 1 in : 2 out), the model below is used to display the minimum UTXO value based on variable transaction fee rates.\u00a0 You can use this to identify a personally tolerable maximum fee %.\u00a0\u00a0<\/p>\n \u201cA lot of newbies advised to \u201cDCA and withdraw\u201d are going to get wrecked by fees when they try to sell\/spend their thousands of tiny dust UTXO. It\u2019s going to be a bad scene.\u201d<\/p>\n \u2013 Andreas Antonopoulos<\/a> \u2013 Author Mastering Bitcoin<\/p>\n (250 s\/vB x fee) \/ %5 sat\/vB<\/strong>10 sat\/vB<\/strong>50 sat\/vB<\/strong>75 sat\/vB<\/strong>150 sat\/vB<\/strong>250 sat\/vB<\/strong>50% maximum fee<\/strong>2.5k sats5k sats25k sats37.5k sats75k sats125K sats25% maximum fee<\/strong>5k sats10k sats50k sats75k sats150k sats2.5M sats10% maximum fee<\/strong>12.5k sats25k sats125k sats187.5k sats375k sats625k sats5% maximum fee<\/strong>25k sats50k sats250k sats375k sats750k sats1.25M sats2.5% maximum fee<\/strong>50k sats100k sats500k sats750k sats1.5M sats2.5M sats1% maximum fee<\/strong>125k sats250k sats1.25M sats1.875M sats3.75M sats6.25M sats<\/p>\n Below you\u2019ll find a chart of the maximum fees you will pay based on each UTXO quantity compared with the current network fee.\u00a0 For example, a 500k (0.01 BTC) UTXO can expect to pay 2.5% fee rate when the mempool is averaging 50 sat\/vByte and 7.5% at 150 sat\/vByte.<\/p>\n (250 s\/vB x fee) \/ UTXO5 sat\/vB<\/strong>10 sat\/vB<\/strong>50 sat\/vB<\/strong>75 sat\/vB<\/strong>150 sat\/vB<\/strong>250 sat\/vB<\/strong>50k sat UTXO<\/strong>2.5% max fee5% max fee25% max fee37.5% max fee75% max feeDUST100k sat UTXO<\/strong>1.25% max fee2.5% max fee12.5% max fee18.75% max fee37.5% max fee62.5% max fee500k sat UTXO<\/strong>0.25% max fee0.5% max fee2.5% max fee3.7% max fee7.5% max fee12.5% max fee1M sat UTXO<\/strong>0.13% max fee0.25% max fee1.25% max fee1.8% max fee12.5% max fee6.25% max fee5M sat UTXO<\/strong>0.03% max fee0.05% max fee0.25% max fee0.375% max fee0.75% max fee1.25% max fee<\/p>\n *Estimates above assume single-sig bech32 Native SegWit transactions.\u00a0 Multi-sig wallets can 2x+ the expected cost to transfer UTXOs.\u00a0<\/p>\n As demand for Bitcoin grows over the years, it\u2019s difficult to predict exactly what rates will be.\u00a0 In December 2023 we saw a drastic increase in fees averaging over 100 sats\/vByte as Bitcoin broke $40k on the heels of ETF approval then rebounded over $50k in February 2024.<\/p>\n Smaller UTXOs will continue to decline in value as their fee rate eclipses their stored value which applies pressure to bag holders who have to wait for lower fees to consolidate UTXOs<\/a> or watch as their wealth is debased due to poor UTXO maintenance.\u00a0<\/p>\n Let\u2019s assume you make a $20 buy in January 2024 yielding 50,000 sats (0.0005 BTC).\u00a0<\/p>\n Even if the price of Bitcoin soars, network fees aren\u2019t tied to the value of the Bitcoin amount.\u00a0 Fees are calculated in sats\/vByte which represents an amount multiplied by the size of the transaction data.\u00a0\u00a0<\/p>\n In a $1M Bitcoin world, your $20 0.0005 BTC may be worth $500, but we still need to consider the scenario where the network fees are closely correlated with the rising price of Bitcoin. \u00a0 See the table below and feel free to plug in your own numbers.\u00a0\u00a0<\/p>\n 0.0005 BTC UTXO<\/strong>10 sat\/vB<\/strong>50 sat\/vB<\/strong>100 sat\/vB<\/strong>150 sat\/vB<\/strong>250 sat\/vB<\/strong>500 sat\/vB<\/strong>$75,000 BTC 0.0005 = $37.5<\/strong>0.000025 BTC fee ($1.87)\u00a0 5%\u00a0 \u00a0 \u00a0 \u00a0 Net: $35.630.000125 BTC fee ($9.37) 25%\u00a0 \u00a0 \u00a0 Net: $28.130.00025 BTC fee ($18.75) 50%\u00a0 \u00a0 \u00a0 \u00a0 Net: $18.750.000375 BTC fee ($28.13) 75%\u00a0 Net: $9.370.000625 BTC fee ($46.88) 125% Net: -$9.380.00125 BTC fee ($93.75) 250% Net: -56.25$100,000 BTC 0.0005 = $50<\/strong>0.000025 BTC fee ($2.50)\u00a0 5% Net: $47.50.000125 BTC fee ($12.50) 25% Net: $37.500.00025 BTC fee ($25)\u00a0 \u00a0 \u00a0 50% Net: $250.000375 BTC fee ($37.50) 75% Net: $12.500.000625 BTC fee ($62.50) 125% Net: -$12.500.00125 BTC fee ($125) 250% \u00a0 \u00a0 \u00a0 Net: -$75$250,000 BTC 0.0005 = $125<\/strong>0.000025 BTC fee ($6.25)\u00a0 5% Net: $118.750.000125 BTC fee ($31.25) 25% Net: $93.750.00025 BTC fee ($62.50) 50% Net: $62.50.000375 BTC fee ($93.75) 75% Net: $31.250.000625 BTC fee ($156.25) 125% Net: -$31.250.00125 BTC fee ($312.50) 250% Net: -$187.50$500,000 BTC 0.0005 = $250<\/strong>0.000025 BTC fee ($12.50) 5% Net: $237.500.000125 BTC fee ($62.50) 25% Net: $187.500.00025 BTC fee ($125)\u00a0 \u00a0 50% Net: $1250.000375 BTC fee ($187.50) 75% Net: $62.500.000625 BTC fee ($312.50) 125% Net: -$62.500.00125 BTC fee ($625) 250% Net: -$375$1,000,000 BTC 0.0005 = $500<\/strong>0.000025 BTC fee ($25) \u00a0 \u00a0 5% Net: $4750.000125 BTC fee ($125) 25% Net: 3750.00025 BTC fee ($250)\u00a0 \u00a0 50% Net: $2500.000375 BTC fee ($375)\u00a0 \u00a0 75% Net: $1250.000625 BTC fee ($625)\u00a0 \u00a0 125% Net: -$1250.00125 BTC fee ($1,250) 250% Net: -$750<\/p>\n The table above is an argument that anti-Bitcoiners are quick to jump on. \u00a0 Anecdotally, we all deal with similar marginal cost adjustments in real life.\u00a0\u00a0<\/p>\n For example, the $300,000 you borrowed to purchase a home at 6% interest over 30 years comes with a cost to service the debt. Your monthly mortgage payments of $1,799 over 30 years cover both principal and interest.\u00a0 You\u2019ll pay $347,515 in interest payments alone and a whopping $647,514 total over the lifetime of the loan until it\u2019s paid off.<\/p>\n \u201cYa but the home increases in value\u201d<\/em><\/p>\n Ok, how about that Disney trip you put on a credit card at 15% interest?\u00a0 Or the Buy Now, Pay later for your kid\u2019s Christmas presents.<\/p>\n If Bitcoin\u2019s price increases alongside miner fees in the coming halving epochs, we may reach a time when self-custody is out of reach for the normal investor let alone developing nations that Bitcoin seeks to liberate from financial overreach.\u00a0\u00a0<\/p>\n The solution (imho) expansion of Lightning (other Layer 2s) to reduce main-net volume and an FDIC-like insurance infrastructure protecting investors who keep their BTC on-exchange.<\/p>\n In the meantime, getting smarter about UTXO management is your responsibility.\u00a0\u00a0<\/p>\n One single Bitcoin transaction can be made up of multiple input UTXOs that are spent in the transaction.\u00a0 Each input UTXO has three main parts:<\/p>\n Amount in BTC<\/p>\n Locking-Script-Size and\u00a0<\/p>\n Locking-Script listing the conditions required to \u2018spend\u2019 the output\u00a0<\/p>\n These UTXO components represent a \u2018weight\u2019 (data size) which is measured in Virtual Bytes (vBytes).\u00a0\u00a0<\/p>\n Network fees are calculated in sats\/vByte which represents how many Satoshis are required to be paid per virtual byte (vByte) of data.<\/p>\n Miners prioritize the transactions they select to include in the candidate block based on who\u2019s willing to pay the highest fee.\u00a0 The Network Fee Rate follows an elastic demand curve and supports Pay-for-Priority where someone who needs a transaction processed faster will pay higher fees.<\/p>\n Using multiple UTXOs as inputs in a transaction adds 68-148 vBytes per UTXO which is multiplied by the network rate of x sats\/vByte to calculate your fees.<\/p>\n The biggest transaction ever sent on the bitcoin network<\/a> happened in 2015 included a whopping 5,568 inputs of 0.00001 BTC combined into one (1) output of 0.05569 BTC and filled the entire block of ~1MB data (999,657 vBytes).\u00a0 At 1 sat\/vByte ~20% of the transaction was paid in fees.\u00a0\u00a0<\/p>\n Luckily there\u2019s a solution to saving money on fees\u2026UTXO batching and consolidation.\u00a0\u00a0<\/p>\n UTXO Batching is to \u2018outputs\u2019 as Consolidating is to UTXO \u2018inputs\u2019.<\/p>\n Let\u2019s unpack this\u2026<\/p>\n Batching <\/strong>is a transaction that creates multiple outputs<\/strong> from an input.\u00a0\u00a0<\/strong><\/p>\n When you transfer Bitcoin from an exchange (CEX) to a cold wallet, for example, your exchange will typically batch together multiple withdrawal requests to save on fees.<\/p>\n Batching many transactions into one also saves space on the blockchain.\u00a0\u00a0\u00a0\u00a0<\/p>\n Behind the scenes, the CEX selects 1 input UTXO which gets split up accordingly and sent to the various receiving addresses as multiple outputs.\u00a0\u00a0<\/p>\n Consolidating<\/strong> is using multiple input UTXOs to create an output.\u00a0\u00a0<\/p>\n UTXO Consolidation<\/strong> is sending Bitcoin (BTC) in your wallet to another wallet(s) that you control.\u00a0 The many UTXOs you accumulated over the years from a weekly DCA are used as inputs to create 1 output.\u00a0<\/p>\n It\u2019s like having a stack of twenty single dollar bills in your pocket and asking the cashier for a $20 bill.<\/p>\n If you don\u2019t consolidate your UTXOs, there\u2019s a chance that over time you could have UTXOs that are unprofitable to spend in a transaction because their value is so low compared to the network fee.\u00a0<\/p>\n Privacy is also a concern when batching and consolidating UTXOs.\u00a0\u00a0<\/p>\n As soon as you send or receive Bitcoin on the Network, your address is forever linked to the transaction.\u00a0\u00a0<\/p>\n Anyone can see the source of the Bitcoin being sent and the destination address of the receiver.\u00a0 They can also see the amount of Bitcoin these addresses control.<\/p>\n Your address is pseudonymous to your real identity.\u00a0 If you share an address you\u2019ve reused for previous transactions, that person is now able to see your entire transaction history.\u00a0<\/p>\n Pro Tip \u2013 <\/strong>generating a new Bitcoin address to receive Bitcoin for every transaction is highly recommended for privacy on the network.\u00a0\u00a0<\/p>\n It\u2019s easy for someone like me to pass along sage advice, but putting this into practice without a plan is setting yourself up to be doxed.\u00a0\u00a0<\/p>\n When you create a new address<\/strong> to receive Bitcoin, your wallet is programmed to generate a new key pair <\/strong>(public key + private key) which are derived from the same root key <\/strong>(aka \u2013 master key).<\/strong><\/p>\n If you need to transfer wallet providers or restore a hardware wallet after a firmware update, your backup recovery seed<\/a><\/strong> is all that\u2019s required to recreate your wallet balances.\u00a0\u00a0<\/p>\n There is no limit to the number of wallet addresses you can create.\u00a0 By default, each different cryptocurrency you own creates a new account within your wallet.\u00a0\u00a0<\/p>\n Your wallet contains a master root key<\/strong> from which all other key pairs are derived each time you generate a new address.\u00a0\u00a0<\/p>\n Here are some options to manage your wallet addresses and segregate your Bitcoin (in no particular order):<\/p>\n Option 1: <\/strong>Create multiple private accounts from one single Hierarchical Deterministic modern wallet.\u00a0<\/p>\n Ledger, for example, is an HD wallet which by default can create an infinite number of addresses.\u00a0 This is one way to \u2018batch\u2019 your transactions depending on their source and potential use in the future.\u00a0 Label your accounts depending on how you are segregating your Bitcoin.\u00a0\u00a0<\/p>\n Pros: HD Wallet software interfaces make it easy to apply metadata descriptors like contact details, a description or notes to keep things organized and enhance privacy<\/a>.<\/p>\n Cons: If you\u2019re transferring wallets, your new provider may not be able to replicate the metadata (name\/description) for each of your wallet addresses or accounts.\u00a0<\/p>\n Option 2: <\/strong>Use multiple (cold) hardware wallets, each with its own recovery seed.\u00a0\u00a0<\/p>\n You will need to determine which wallet is for what Bitcoin addresses to avoid commingling.\u00a0 For example, if you acquire Bitcoin from a KYC exchange, avoid sending Bitcoin you receive as a payment, gift, or from any other non-KYC source.\u00a0\u00a0<\/p>\n Pros: This is a hedge against the unlikely event that your wallet seed is ever compromised ensuring you\u2019re less likely to lose everything.\u00a0\u00a0<\/p>\n Cons: Multiple recovery seeds to manage if you need to restore a wallet.\u00a0 This could be inconvenient if you have only one device that needs to be restored each time you want to transact from a different wallet.\u00a0\u00a0<\/p>\n Note: from a privacy perspective, this strategy holds up as long as you don\u2019t mix funds when consolidating or batching UTXOs.<\/p>\nHow are UTXOs Assigned to Wallet Addresses?<\/strong><\/h2>\n
Key differences between traditional banking and Bitcoin:<\/strong><\/h2>\n
Key Terms UTXOs:<\/h3>\n
UTXOs Role in Bitcoin Transactions<\/strong><\/h2>\n
How UTXOs are Similar but Different from Physical Cash?<\/strong><\/h2>\n
What are Bitcoin Dust UTXOs?<\/strong><\/h2>\n
How can I fix my Bitcoin dust problem?<\/h3>\n
Marginal Cost to Move and Transact with Bitcoin<\/strong><\/h2>\n
Table 1: Dust Threshold Model<\/strong><\/h3>\n
Table 2: UTXO Value to Fee Percentage Comparison<\/strong><\/h3>\n
Example of $20 Value UTXO\u2019s Cost To Transact Based on Price<\/strong><\/h3>\n
Table 3: Waiting for BTC Price Increases to Consolidate UTXOs<\/strong><\/h3>\n
How Multiple UTXOs Increase the Transaction Size<\/strong><\/h2>\n
What\u2019s the difference between UTXO Batching and Consolidating?<\/strong><\/h2>\n
UTXOs and Privacy on the Blockchain<\/strong><\/h2>\n
Managing Multiple Bitcoin Accounts and Addresses<\/strong><\/h2>\n