If you pop over to http://mempool.space (@mempool), you'll notice fees are quoted in "sat/vB", which stands for satoshis per byte. Since there are 1,000,000 bytes in a megabyte, and blocks have a maximum size of 4 megabytes, each block has limited space.
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The more space your transaction takes up, the more expensive it will be.
Let's break down a hypothetical transaction: If your transaction is 250 bytes in size & the current fee rate is 10 sat/vB, then your fee (250 x 10) would amount to 2,500 sats or approximately $1.29.
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You're probably wondering, "What factors contribute to increasing transaction size?"
One of the primary factors is UTXOs (Unspent Transaction Outputs). When Bitcoin enters our wallet, a UTXO is generated.
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For example, if we receive $100 worth of Bitcoin today, we'll have a UTXO for 0.0015 Bitcoin. Essentially, this UTXO represents unspent Bitcoin in our wallet awaiting use— hence the name.
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Transaction weight/size grows with the number of UTXOs involved. Imagine having 10 UTXOs of $10 each and needing to send $100 to a friend. Compare this to having a single UTXO of $100 for the same transaction.
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The latter scenario above is more cost-effective, as it involves fewer UTXOs, reducing the transaction weight. You could also think of an efficient UTXO transaction like paying for $20 worth of groceries with a $20 bill instead of 200 dimes—the single bill is far simpler.
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So why does this matter? Simply put, transaction fees are rising. If we have many smaller UTXOs—such as when DCA'ing directly to cold storage—the transaction fees can quickly eat into our stack when we go to transact with our Bitcoin.
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This is especially true if we have UTXOs smaller than the transaction fee. In such cases, our BTC becomes impractical to send, as the fee would surpass the UTXO value. Therefore, when receiving Bitcoin/ managing our wallets, it's crucial to consider future fee scenarios.
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For instance, if fees rise to $25 in five years, having numerous small UTXOs, each worth less than $25, renders our entire stack unusable. So, how do we get around this?
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For me, I approach UTXO management by accumulating purchases on exchanges until reaching an amount that I would feel uncomfortable losing, say ~$500, before withdrawing to a hardware wallet. This strategy ensures UTXOs remain sufficiently sized as fees continue to rise.
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Additionally, fees fluctuate— they're not on an endless upward march. During periods of lower fees, it's a good time to consolidate your UTXOs. With @SparrowWallet, it's simple. Just choose the UTXOs you want to consolidate, pay the transaction fee, and presto!
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You'll have a single UTXO instead of multiple smaller ones.
In conclusion, UTXOs matter. While they may sound like technical jargon gobbledegook, it's vital to grasp their significance, especially with the potential for rising transaction fees.
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Understanding their importance and adopting strategies to prevent Bitcoin from getting stuck in small UTXOs is key.
Hopefully, you found value in this thread. Comment below if you have any questions!
Still lost? nostr:npub1jqckepsld3xn98aeq7yg72g0yrqkz92vegkv6k3prfhkzu356v5qa6akee & I will be discussing UTXOs at @BitcoinAtlantis.
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