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.