With the upcoming Bitcoin halving it’s becoming essential to make sure you do not have all your balance in dozens of UTXOs. UTXO stands for Unspent transaction (TX) Output. Every time you generate new wallet to receive a Bitcoin payment, you will receive it as an UTXO which you can obviously spend in your turn.
Why is it important?
Let’s say you do Bitcoin DCA (dollar cost averaging) – regularly buying certain amount of Bitcoin, like $10 each day/week/month. This will create big amount of UTXOs in your wallet. Imagine that every UTXO is a separate wallet with cash. So, next time you need to make a big purchase in a shop, you will have to take 10 wallets with you. And every time you take cash from your wallet, you pay a certain fee. This is what happens when you spend Bitcoin which you received before in small amounts.
It’s OK when the transaction load on the blockchain is low, but when it’s high (and we expect it to be high after halving) transactions fees will sky rocket so that one can pay $50-$100 per transaction made from multiple UTXOs.
What means to consolidate UTXOs?
Consolidate Bitcoin UTXO means to spend the unspent. Or in other words to send all your Bitcoin to a new address of yours in a single transaction. Below I will show you how to do it in Electrum wallet, but you can do it likewise in any other wallet.
- Create a new receiving address. Tab “Receive” > “Create Request”. Copy created address.
- Send all Bitcoin to the newly created address using Max option, as shown below. (Do not send anything to the address on the example. Make sure you use your newly created address.)
As you can see the transaction fee is already quite high but that’s because I’m consolidating more then 20 UTXOs and the miners fees have already climbed up by this time. You can always monitor the fees (mempool.space website is a good one for this) and make the consolidation when fees drop.
By consolidating UTXOs you ensure that next time you spend Bitcoin, it’s sent from a single UTXO without combining multiple balances and paying multiple fees.
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