When you own Bitcoin, it is always stored in an address on the blockchain. To increase privacy, it is advised to spread your funds across several addresses because all addresses and transactions are publicly visible. Here's why this is important and how to manage it effectively:
Public Visibility: When you spend Bitcoin from an address, others can see the transaction and the remaining balance. For instance, if you own 1 Bitcoin and send $5 worth of Bitcoin to a friend, the transaction will involve the entire 1 Bitcoin. Your friend receives $5 worth, and the remaining Bitcoin is sent back to you as change. This allows your friend to see that you originally had 1 Bitcoin.
Using Multiple Addresses: By using multiple addresses, you can prevent others from seeing your total balance. For example, if you split your 1 Bitcoin into 10 addresses, each holding 0.1 Bitcoin, and use one of these to send $5 worth of Bitcoin, your friend will only see a fraction of your total holdings.
Transaction Costs: Regularly using small amounts of Bitcoin in many addresses can lead to high transaction fees. When Bitcoin prices rise, transaction costs can increase significantly. If you need to consolidate these small amounts into a single address, you'll have to pay a fee for each address involved, which can add up.
Consolidating Addresses: To avoid high fees, it's advised to consolidate your addresses periodically, especially when transaction fees are low. However, consolidating addresses reduces privacy because it links previously separate addresses.
Best Practices: Avoid putting too low values in a single address to minimize the need for frequent consolidations. Aim to keep each address holding an amount in the high three-figure to low four-figure range. This way, fees remain low compared to the value of Bitcoin in the address, and you maintain privacy by spreading your funds across several addresses.
Summary
- Use multiple addresses to improve privacy.
- Avoid small balances in many addresses to minimize consolidation needs.
- Consolidate addresses when transaction fees are low.
- Maintain privacy by not combining too many addresses into one.
It is always a compromise between privacy and transaction costs. Anticipate that Bitcoin prices and transaction fees might rise dramatically in the future. If the balance in your address is too small, it could become unspendable because the transaction fee to move the Bitcoin might be higher than the balance in that address.
