If you've been withdrawing your Bitcoin into self custody every week, you might unknowingly be setting yourself up for a big problem later. It's because of this technical thing that almost nobody talks about, something called UTXOs (unspent transaction outputs).
I explained this in more detail in my previous post, but each UTXO is a chunk of Bitcoin. It could be 0.0001 BTC, 0.001 BTC, or 1 BTC, whatever. No matter the amount or value, each UTXO takes up roughly the same amount of data on the blockchain.
Now, the problem starts when you're constantly withdrawing small amounts of Bitcoin, little weekly buys and self custody moves. Over time, you end up with tons of tiny UTXOs. Like a hundred different UTXOs worth 0.0002 BTC each, or 0.001 BTC each.
Today, when fees are low, it's not a big deal. But fast forward into the future when blockspace becomes super scarce, maybe because of something dumb like Inscriptions clogging up the mempool, and fees are going to skyrocket.
When that happens, trying to spend a tiny UTXO could cost you more in fees than the UTXO is worth. It'll basically make your Bitcoin stuck and unusable. Meanwhile, someone who self custodied a single large 0.5 BTC UTXO or a 2 BTC UTXO? They'll have no problem moving their coins, even when fees are ridiculous.
That's why UTXO management matters. It's about staying nimble for the future.
So what you need to do is consolidate your small UTXOs into larger ones while fees are still cheap. I'll show you how to do it using Sparrow Wallet, whether you use a Ledger Nano X, a Trezor Model T, or a Coldcard Mk4.
Here's how you consolidate UTXOs...
First, load up Sparrow Wallet with your hardware wallet connected. In Sparrow, click over to the UTXOs tab. You'll see a list of all your little UTXO chunks.
What you want to do is select several of the small UTXOs. Pick the ones you want to merge.
Right click and hit Send Selected.
Now, where are you sending them? You're not sending them to a different wallet or paying yourself twice.
Instead, you'll send them to a fresh, unused address inside the same wallet.
(That way you only pay fees once.)
Head over to the Addresses tab in Sparrow. Find the first unused address.
Right click it and choose Sign/Verify Message to make absolutely sure it belongs to your hardware wallet. (Good habit, don't skip this.)
Type a quick message like "This is a test" and click Sign.
On your Ledger/Trezor/Coldcard, approve the message signing.
Once Sparrow verifies the address belongs to your device, copy that address.
Now go back to the Send screen, paste that address as the destination, and label the transaction something like UTXO Consolidation.
You'll see that you're combining (for example) five tiny UTXOs into one single output.
Adjust the fee slider, if you want it to confirm fast, pick 1-block fee if you're willing to wait a few blocks, pick lower fees.
(Quick tip: always double check the live fee market at mempool.space.)
When everything looks good, click Create Transaction -> Finalize Transaction for Signing -> Sign with Hardware Wallet.
Double check the addresses again on your hardware device, approve the transaction, and then Broadcast Transaction.
Boom. Done.
If you check your UTXOs tab now, you'll see that instead of five tiny UTXOs, you now have one larger, cleaner UTXO sitting there.
Why consolidate?
Because in the future when fees are crazy, and they will be 😐 it'll cost you way less to move a single 0.05 BTC UTXO than it would to move ten separate 0.005 BTC UTXOs.
You're setting yourself up to actually use your Bitcoin when you need it, not have it frozen by insane fees.
Important: You can consolidate UTXOs across wallets too (Ledger to Coldcard, whatever), but it's simpler and cheaper to do it inside the same wallet whenever you can.
Let me know what you think, and if someone has some advice, leave a comment ^^,