This is how Fees work in the Bitcoin Network
Bitcoin network fees are the result of supply and demand. Since storage space in a Bitcoin block is limited (supply), transaction fees automatically increase as network demand increases. You can go to websites like mempool.space to get an overview of current fees and decide when it's a good time to make a transaction.
What does the Amount of Fees for a Bitcoin Transaction depend on?
The amount of the fee does not depend on the amount of Bitcoin sent. Instead, it depends on the amount of data in your transaction: The more data your transaction contains, the more space it requires on the blockchain and the higher the fees.
When a lot of inputs (UTXOs) are required for a transaction, the storage space increases and therefore the fees that your transaction requires.
What are UTXOs?
UTXOs (Unspent Transaction Outputs) are discrete and indivisible Bitcoin amounts. When someone sends you Bitcoin, you get new UTXOs in your wallet.
With a Bitcoin transaction, you must spend the entire value of the selected UTXO and may receive exchange UTXOs back.
An example:
Let's say someone sends you 3 bitcoin. You now have a UTXO worth 3 bitcoin. If you want to spend 1 bitcoin later, your wallet first sends the UTXO of 3 bitcoin, the recipient receives 1 bitcoin and you receive a new UTXO worth 2 bitcoin as change.
Bitcoin's UTXO (Unspent Transaction Output) model ensures that bitcoin are not spent twice — a known problem with digital currencies. Each UTXO is basically a piece of bitcoin that is considered uniquely identifiable. When you make a bitcoin transaction, you use this UTXOs as an “input,” i.e. as a means to make the payment. These UTXOs are then consumed in the transaction and are no longer available.
In a transaction, these inputs are processed and result in new “outputs,” which either flow back to you as new payments to other people or as change. These new outputs become new UTXOs that can be used in future transactions. Put simply, inputs are the amounts that you spend and outputs are the amounts that you or others receive.
The UTXO model allows all network nodes to determine the total amount of bitcoin in existence at any time by calculating the value of all UTXOs on the blockchain (the so-called “UTXO set”).
From our article”What are UTXOs and 3 tips for good UTXO management”.
To save fees, you should preferably store large or suitably sized UTXOs in your wallet. As a result, your future transactions contain fewer data and you have to pay less.
What can you do if you already have a lot of small UTXOs in your Wallet?
As long as you've got your UTXOS in order, you're gonna make it.
- @w_s_bitcoin
If you own a lot of small UTXOs, you should consolidate them to save on fees in the future. This means that by making a transaction, you combine many small UTXOs into one UTXO and send them to one of your bitcoin addresses. Be sure to do this consolidation during periods of low fees.
Prevention is better than Aftercare
It's even better if you're careful not to accumulate too many small UTXOs from the start.
21bitcoin offers an excellent opportunity to proactively manage UTXO. You collect sats in the 21bitcoin app over a longer period of time and send them to your own wallet in one transaction as soon as the amount of how big you want your UTXO is reached. Thanks to the Auto Wallet Transfer feature, you can even automate this process. As a result, you only accumulate a few large UTXOs in your wallet and also save transaction fees as you send bitcoin to your wallet less often.
