What is a UTXO?

UTXOs, or "Unspent Transaction Outputs", are a fundamental concept in how cryptocurrencies like Bitcoin operate. A UTXO represents a certain amount of Bitcoin that has been received at an address but has not yet been spent.

📽 Watch our detailed explanation video:
👉 UTXO

How Do UTXOs Work?

When a Bitcoin transaction is made, it consumes one or more existing UTXOs as inputs and creates new UTXOs as outputs.

To understand this better, think of each transaction as a movement of funds from one address to another, where the total incoming funds must equal the total outgoing funds (including transaction fees).

📌 Example:

Transaction Input: You receive 1 BTC from a friend ( this creates a UTXO of 1 BTC at your address).
Transaction Output: You decide to spend 0.5 BTC on a purchase. Your transaction will use the 1 BTC UTXO as input and create two new outputs:

0.5 BTC (to the seller)

0.5 BTC (returned to you, known as "change")

Managing UTXOs

Managing UTXOs can sometimes be complex, especially if you frequently send and receive Bitcoin. Here are some best practices for effective management:

✅ Use a Bitcoin wallet that automatically manages UTXOs

Most modern Bitcoin wallets automatically select the appropriate UTXOs for your transactions.

✅ UTXO Consolidation

If you have many small UTXOs, consider consolidating them into a single transaction when network fees are low.
This can reduce future transaction costs.
📽 Watch our tutorial on UTXO Consolidation

✅ Understanding Fees

Transaction fees are often based on the transaction size in bytes, not the BTC amount.
Using multiple small UTXOs can increase transaction size and, therefore, fees.

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Updated on: 29/03/2025