You might be wondering if this is even a problem for you right now, and honestly, it depends on your situation. The fact is that it does effect everyone, so you need to be aware. Still, if you’ve received a large amount of UTXOs (for example, if you buy a small amount of bitcoin regularly and spend a lot of bitcoin), you should start considering taking steps to manage your UTXOs sooner rather than later. Since the bitcoin you own today may be worth far more in the future, it’s better to be cautious.

Now that we know that managing these UTXOs is essential, wouldn’t it be great if you could organize them? Yes!

Let’s introduce the concept of UTXO consolidation: the process of combining smaller UTXOs into one larger UTXO by sending a transaction to yourself. This will help reduce fees and simplify your future transactions.

You would usually only want to consolidate UTXOs from the same source (for example, keeping business payments separate from personal savings). This way, you can maintain your privacy while managing your UTXOs efficiently and saving on future fees.

*It’s usually recommended to avoid combining all your funds into a single UTXO*

How do you do this?

First, wait until bitcoin fees are quite low. Then, select which UTXOs you want to combine and send them to yourself, creating a new, single UTXO. This is easy to do in Trezor Suite.

So in practice, you can consolidate UTXOs selectively, maintain your privacy, and avoid higher fees.

Important: If you’re not careful, UTXO consolidation comes with a privacy risk. Although it will reduce future fees, if you merge UTXOs linked to different addresses, you could end up revealing your total wallet balance on the blockchain.

Billy buys bitcoin monthly, and each time it’s sent to a different address.

He also receives regular bitcoin payments for freelance work he does to the same wallet.

Billy’s wallet contains UTXOs that aren’t linked, so his overall wallet balance remains private, but all these UTXOs will result in higher transaction fees. So Billy decides to consolidate his bitcoin by sending it all to his wallet, creating a new, single UTXO.

By combining and consolidating all these UTXOs at once, Billy is revealing his entire bitcoin wallet balance to the blockchain. Both the exchange that he was buying bitcoin from and anyone who was paying him in BTC can now see his total wallet balance!

*This is irreversible*

Once you do this, it cannot be reversed. If your holdings become publicly known, this could lead to future security issues.