Can someone explain the implications of this to me (like I’m five)? nostr:note1z4v06qvcn8gpz8ynkekxkhcp42fhfh5wwavmame7nrfv7cjthdzqmu46ud
Discussion
Yes - but what specifically are you wondering?
When you receive Bitcoin into your wallet, it is stored as a single transaction (UTXO). This is like a single box with Bitcoin in it. To show you the amount of Bitcoin you own, your wallet opens every box (UTXO) and adds together all of the amounts. If you want to send Bitcoin to someone, your wallet opens a box to see if there is enough in there for the amount you want to send. If there isn’t enough, it opens another box and adds that amount. Eventually it opens enough boxes until it gets enough to cover the amount you want to send.
For every box that is opened (UXTO), there is a fee. The more boxes you open, the more data that has to be sent with the transaction. When Bitcoin fees get high, it becomes very expensive to send Bitcoin when your wallet has many little boxes with small amounts of Bitcoin.
To save on costs, it is better to have only a few bigger boxes (UTXOs) that have higher amounts of Bitcoin in them. That way when you send Bitcoin to someone, your wallet can find the correct amount in the first box it opens.
There is a privacy trade-off here. Pooling your Bitcoin into a single UTXO means that you are connecting many transactions with each other.
I just DCA and HODL right now. Do I need to pay attention to this? Do I need to do anything differently?
It depends. What size are your withdrawals usually?
Depending on your wallet software you should be able to see how many UTXOs - or “Bitcoin chunks” you have.
If you have been withdrawing small amounts of Bitcoin frequently, you’re probably going to want to combine them into bigger chunks. If you have been withdrawing large amounts, you are in the clear.
This likely isn’t a crippling issue either way - but fee efficiency is important, especially if we assume fees will be 10x higher in the future. Best to adopt efficient practices now.
Yeah, if it’s all DCA transactions then there is less of a privacy consideration. They are all your transactions already. Every once in a while when fees are low, you could send your bitcoin from your wallet back to your wallet in one big transaction.
When you receive Bitcoin into your wallet, it is stored as a single transaction (UTXO). This is like a single box with Bitcoin in it. To show you the amount of Bitcoin you own, your wallet opens every box (UTXO) and adds together all of the amounts. If you want to send Bitcoin to someone, your wallet opens a box to see if there is enough in there for the amount you want to send. If there isn’t enough, it opens another box and adds that amount. Eventually it opens enough boxes until it gets enough to cover the amount you want to send.
For every box that is opened (UXTO), there is a fee. The more boxes you open, the more data that has to be sent with the transaction. When Bitcoin fees get high, it becomes very expensive to send Bitcoin when your wallet has many little boxes with small amounts of Bitcoin.
To save on costs, it is better to have only a few bigger boxes (UTXOs) that have higher amounts of Bitcoin in them. That way when you send Bitcoin to someone, your wallet can find the correct amount in the first box it opens.
There is a privacy trade-off here. Pooling your Bitcoin into a single UTXO means that you are connecting many transactions with each other.
Ahhh. Ok that makes a lot of sense. Thanks!
Fees are too high (or too low)