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@ todd
2023-09-06 18:50:37Many people choose Bitcoin for self-sovereignty or for tactical reasons, such as Bitcoin enabling them to easily send cross-border payments with low fees. However, it’s important to understand the best way to acquire, hold and send bitcoin in order to minimize the fees being paid. Bitcoin fees can vary widely depending on circumstances. This section applies to Bitcoin “on-chain” fees. Lightning fees are lower, and you will usually want to prefer to use Lightning when possible.
Each Bitcoin on-chain transaction uses multiple UTXOs. UTXOs are unspent transaction outputs. River Financial recently wrote a good introduction to UTXOs. You can think of UTXOs as monetary denominations used for transactions. For example, if you were charged a fee based on the number of currency bills you used, what denominations would you hold and use? It depends, right? We will try to help you answer that question. Here are a few example Bitcoin transactions (transaction sizes taken from this transaction size calculator):
| Address Type and UTXOs | Size (sats) | vbytes | Fee (sats/vbyte) | Total Fee | Percentage lost to fees | | --- | --- | --- | --- | --- | --- | | P2WPKH (1 in -> 2 out) | 100,000 | 140.5 | 15 | 2108 | 2.1% | | P2WPKH (1 in -> 2 out) | 1,000,000 | 140.5 | 15 | 2108 | 0.2% | | P2WPKH (1 in -> 2 out) | 100,000 | 140.5 | 150* | 21825 | 21.8% | | P2HS 2-of-3 multisig (2 in -> 2 out) | 1,000,000 | 668 | 15 | 10020 | 1% |
- fees like this, and higher, were seen during the “ordinal craze” of early 2023.
As you can see, the smaller the UTXO, the greater the percentage of bitcoin is consumed by fees. But, not all goods are 1M or 100K sats, so what happens to the “change” from a UTXO? Again, thinking of Bitcoin UTXOs as monetary denominations, let’s say you have two (2) 1,000,000-sat UTXOs. Furthermore, you’d like to buy something for 1,100,000 sats. You’ll need both UTXOs as inputs and you’ll get “change” of 900,000 sats as a new UTXO (less fees, of course). Imagine that you have only 100,000-sat UTXOs. You’d need eleven (11) of those UTXOs, including fees, to pay for a 1,000,000-sat purchase. The vbytes would be 3309, and it would cost you 49,635 sats at 15 sats/vbyte fee. With the Lightning Network, fees are much lower, and you do not create new UTXOs with the “change”. But, the Lightning Network may not accommodate your larger transactions at this time.
Can you consolidate smaller UTXOs into a large one? Yes. Using the desktop Sparrow wallet application (or other Bitcoin software with UTXO management), select multiple UTXOs to send bitcoin to yourself using a new Bitcoin address. A new UTXO is created using your smaller ones. Here is a demonstration. Look for a low-fee market (e.g. weekends) using Mempool or within the Sparrow app, and do the consolidation. As of the time of this writing, you may get fees as low as 6 sats/vbyte. The smallest UTXO that I personally recommend is 1M satoshis, 1/100th of a bitcoin, preferring to use the Lightning Network for smaller transactions. Beyond the scope of this article, you should also consider using Bitcoin address types that use less space on the Bitcoin blockchain. For example, native Segwit addresses (bc1) are smaller than legacy addresses.
(Note: the demonstration above also shows how to do a Partially Signed Bitcoin Transaction (PSBT) using Sparrow and the ColdCard. It is the safest way to use a Bitcoin wallet.)