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I have a few questions regarding utxo management and consolidation. I know that the more UTXO's you have, the heavier your transaction will be, the more fees you'll have to pay.

The things I don't understand:

  1. How can you effectively avoid that? Let's say I generate a new address every time I self-custody bitcoin, it won't solve the problem, does it? When I'll want to send either the max balance or let's say a rather large amount that needs a lot of utxo's to be complete, the full tx's will be heavy no matter what, correct? So using the same address for cold storage (i.e just a receiving address) or using a new one every time doesn't change a thing?
  2. If a wallet has coin control, does it really matter to do utxo management?
  3. Let's say I have a single address with 100 UTXO associated to it. I want to consolidate everything. I first generate a new address on my wallet, test that address by sending a small amount (from an exchange let's say). If everything seems correct, I can then use the send max feature of my wallet to that address (everything being under the same seed)? Even though it will effectively also send the utxo I just used for testing the validity of the address back to itself?

I think that's all my questions, thanks.

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UTXO management is not a singular goal. instead, it's a method for balancing multiple priorities, including privacy, short-term fee savings and long-term fee savings.

Having lots of UTXOs is probably better for privacy, especially if they're each in different addresses. But like you said, that will cost more in fees if you want to send your entire balance.

On the other hand, having all your bitcoin in one UTXO is probably not best for privacy or security.

Coin Control is a feature of some wallets, that allows users to directly control their UTXO management strategy. Wallets that don't use coin control make those decisions for the user instead, so Coin Control is usually best for advanced users who know what UTXO management strategy they want.

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  • But so it means no matter what, if you are a long term holder/has been in Bitcoin for a while and you don't transact a lot (i.e you've been stacking sats regularly), at some point in time if you wish to transfert your entire balance for whatever reason you're going to find yourself with a huge transaction fee (unless you did consolidate within one UTXO when the mempool was empty but you gave up on privacy). Also, can you expand on how having only one UTXO is not good for security? – Solal Mar 2 at 19:38
  • I'm no expert in this matter, but I'll try to answer. 1) Consolidating all your bitcoin into one UTXO means, if an observer knew one of your UTXOs, they now know all your UTXOs, and can trace your other UTXO histories. – Sachin Meier Mar 2 at 22:03
  • 2) Yes, it's a problem that sitting on lots of small UTXOs may, in the long term, cost you lots of fees. But I'm not sure why someone would ever consolidate all their UTXOs at once. – Sachin Meier Mar 2 at 22:08
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Here is a brief outline on how to do UTXO management:

  • You should consolidate your UTXO on weekends for whenever bitcoin network is less congested. This way you consolidate UTXO with lower fee (around 1 satoshi/byte). Later when you spend money for ecommerce purpose you can afford to pay higher fee/byte as your UTXO count is low. Services like blockonomics will show a TxFee score indicating fragementation of our wallet, which you can optimize
  • Always use native segwit wallets so that when you spend the UTXO you save upto 38% on fee
  • Using a single address to receive funds will not help in decreasing UTXO count. Even in case of single address, UTXO count will increase as each receiving txid will have a new output
  • Note that when you spend bitcoin there will always be some loss of privacy which should be fine for normal users. For high level of privacy you have to use things like coinjoin/mixer which will then again increase the fee you pay

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