Understanding Risks of Small Value UTXOs

What is a UTXO?

UTXO stands for Unspent Transaction Output, which represents chunks of bitcoin you own. When you send or receive bitcoin, it’s tracked as UTXOs. Think of it like having several prepaid cards, each with its own balance.

Why Are Small UTXOs Problematic?

Whenever you use a UTXO, the transaction fee depends on the data size, not the value of the UTXO. This can create issues such as:

• Small-value UTXOs may have their entire value consumed by fees.
• Even medium-value UTXOs can lose a significant percentage of their worth to fees, reducing their effectiveness.

For instance:

• If sending a UTXO costs 10,000 satoshis in fees, and the UTXO itself is worth 10,000 satoshis, there’s nothing left for the recipient.
• If the UTXO is worth 50,000 satoshis, a 10,000-satoshi fee represents 20% of its value.

What is Considered a “Small” UTXO?

Generally, a UTXO smaller than 1,000,000 satoshis (0.01 BTC) is considered small, as higher fees can make them uneconomical to use.

Multisignature wallets or older wallets that don’t use Segwit (a technology that reduces transaction size) require even larger UTXOs to avoid these issues because they involve more data and higher fees.

Why Bitcoin Price Influences UTXOs

As bitcoin’s price increases, the cost of creating properly sized UTXOs also rises:

• In 2019, 0.01 BTC was worth $50.
• By 2025, 0.01 BTC is worth $1,000.

If bitcoin’s price continues to climb, acquiring a “safe” UTXO size could cost thousands of dollars, making it harder for small-scale users to manage their funds effectively.

Steps to Protect Yourself

• Withdraw Larger Amounts: Avoid withdrawing small amounts of bitcoin from exchanges. Instead, wait until your balance reaches a “healthy” UTXO size (e.g., 0.01 BTC or more) before moving it to your wallet.
• Review Your UTXOs: Use wallet tools (like Sparrow Wallet) to check how many UTXOs you hold and their values.
• Combine Small UTXOs: If you have many small UTXOs, consider consolidating them into larger ones when fees are low. This reduces the risk of losing value due to rising fees in the future.
• Explore Collaborative Custody: You can use multisig setups with trusted partners to securely and efficiently manage your UTXOs without handling everything alone.