UTXOs and Euro Coins
An analogy to start with: Imagine that you have a wallet full of euro coins. Each of these coins represents a different value: some are 1 cent coins, others 50 cent coins, and so on. When you want to buy something, you take out the matching coins to pay the exact amount. Sometimes you have to combine lots of small coins to get a larger amount.
UTXOs work similarly to these coins. Each UTXO represents a specific amount of bitcoin. When you make a bitcoin transaction, you select the UTXOs that add up to the desired amount. Just as you can combine multiple 10-cent coins to pay one euro, you can combine multiple UTXOs to make a larger bitcoin transaction.
And just as it would be impractical to pay a large amount using just 1 cent coins, it can be inefficient to use many small UTXOs for a transaction.
UTXOs in a Bitcoin Context
A UTXO is an indivisible amount of bitcoin that you receive when someone sends you bitcoin.
When you send bitcoin, UTXOs are consumed and serve as input for the new transaction. If you want to send a very large amount, you can use multiple UTXOs until you reach the desired amount (the combination of UTXOs is usually automatically transferred from your wallet). The more UTXOs a transaction contains, the more storage space the bitcoin transaction requires and the more expensive it becomes for you as a sender.
The UTXO model ensures that bitcoin cannot be spent twice and is therefore central to the functioning of the bitcoin network.
Why small UTXOs can be problematic
If you buy bitcoin regularly and transfer every purchase to your external wallet, you risk accumulating lots of small UTXOs.
This may seem harmless at first, but it can lead to problems if transaction fees rise in the future. In the worst case scenario, the value of a single small UTXO may be less than the fee charged for its transfer. This would mean that you would pay more to initiate a transaction than the value of the transferred UTXO is.
Going back to the example from the beginning, imagine that you have 100 small coins that are worth 1 cent each, but it costs you 5 cents to use each coin. Pretty impractical, isn't it?
If you want to know more about how to effectively manage UTXOs, we recommend reading our detailed article on the subject.
21bitcoin solves the Problem
21bitcoin offers a practical solution to this issue: Instead of immediately transferring any small amount of bitcoin to your wallet, you can collect bitcoin in the app. As soon as you have reached a certain amount of your own, e.g. 1,000,000 sats, you can automatically transfer the bitcoin to your wallet in a large UTXO.
With many competitors, every purchase of bitcoin is instantly transferred to your wallet. For example, if you stack with high frequency and small amounts, you have no way of avoiding many small UTXOs.
Good to know: Since 21bitcoin covers the network fee for you, the payout of bitcoin to your own wallet only costs you 1,000 sats (currently ~ €0.25), regardless of how high the actual bitcoin network fees are right now.
Conclusion
The world of bitcoin is fascinating and offers many opportunities, but it's important to act with foresight and be aware of potential stumbling blocks.
By using 21bitcoin, you can enjoy the benefits of bitcoin without worrying about potential future problems with small UTXOs.
Why not start today? Try out our app and see how easy it can be to use bitcoin!
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