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In the past one and half year, I've amassed a collection of 18 Unspent Transaction Outputs (UTXOs) through dollar cost averaging every month. Now, I hope to optimize these UTXOs by merging them into a single UTXO, so I can reduce the transaction fees, any advice on this process, thanks.

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The best way to create a consolidation transaction depends on the tooling available to you. If your wallet has coin control, you can manually assemble an input set and decide exactly which UTXOs to combine. On pretty much any wallet, you could consolidate your entire funds by simply sending the entire wallet balance to one of your own addresses.

UTXO management, especially consolidation, is a low-urgency task. Especially if you are doing it to reduce your overall cost, you want to create consolidation transactions at the lowest possible feerate. While in the past years that usually was the minimum transaction relay feerate of 1 ṩ/vB, at this time, you would need to use at least somewhere between 5.15 ṩ/vB to 6.5 ṩ/vB, since the 5–6 ṩ/vB feerate band has not cleared in over a month. In the past, it was possible to keep an eye on the mempool, and opportunistically consolidate whenever the feerates were especially low. In the past half of a year, the blockspace market has significantly changed, and ~5 ṩ/vB looks like the current bottom.

To minimize the cost of spending your future UTXOs, you should use the most blockspace-efficient output type that is available to you. At this time, this will likely be either P2WPKH or P2TR for single-sig wallets.

Depending on the frequency that you transact with the wallet, you may want to keep multiple UTXO in the wallet to ensure sufficient liquidity. If you only have a single UTXO, whenever you make a payment, the remainder of your funds will be returned to yourself in the form of a change output. The change output will be unconfirmed as well. Some wallets never spend unconfirmed UTXOs, and you may be unable to make another transaction until the first confirms. Even if your wallet allows you to create a child transaction, you may be forced to pay additional fees if you need to make another transaction with a higher urgency, as you would need to also bump the parent transaction to the same feerate.

You may also want to keep multiple UTXOs for privacy reasons. If you hold your entirety of funds in a single UTXO, your next recipient will be able to guess that you at least own the amount of your change output. If you consistently “peal off payments” from a single UTXO, it may be trivial for your counterparties to continue tracking your wallet activity by guessing which of the outputs was change.

Be sure to space out your consolidations. If you e.g. were to consolidate after each payment you receive, you would end up increasing your overall cost instead.

If your wallet has a sufficient amount of bitcoins to make it economically reasonable, I would suggest that you keep at least 3–5 UTXOs of a range of different amounts.

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