Importance of a Bitcoin Change Address

[Hyphen(-)]

We all know that UTXO (Unspent Transaction Output) can be defined as the total balance in your Bitcoin wallet, which includes both the balance in your receiving address and the balance in your change address.
A Bitcoin Change address is an address that will receive your remaining Bitcoin after you have spent some of your Bitcoin Balance. Bitcoin transactions are sent as a hole, which means that if I have 5 BTC in my wallet (A), which is my UTXO, and I want to send out 3 BTC to another Bitcoin wallet, the transaction will use my entire 5 BTC in my wallet (A). The 3 BTC will be sent to the recipient address (B), and the remaining 2 BTC will be sent to my wallet change address (C). Although it could be sent back to my previous address, for reasons of privacy, the Bitcoin wallet generates a new address to receive the remaining balance.
Change addresses are provided in Bitcoin wallets for the purpose of user privacy. This is because anyone with an internet connection can access the blockchain and thus view your transaction and know your balance, but if the remaining BTC balance was sent to your change address, one cannot simply conclude that it is the change address or the recipient address.
This is a little illustration for clearer understanding.

Code:

                         ┌──────► Address B(3BTC)
                         │
                         │
                         │
Wallet A (5BTC)─◄───────►│
                         │
                         │
                         │
                         └──────► Address C(2BTC)
  

According to this illustration above, Address (C) is the change address, and it contains the remaining 2BTC change that should be sent back to the wallet as the remaining balance, which wallet(A) will detect and add to your total balance.

[1713955177]

1713955177

[1713955177]

1713955177

[1713955177]

1713955177

[BlackHatCoiner]

Bitcoin transactions are sent as a hole, which means that if I have 5 BTC in my wallet (A), which is my UTXO, and I want to send out 3 BTC to another Bitcoin wallet, the transaction will use my entire 5 BTC in my wallet (A).

No, unless your wallet has only one UTXO. Bitcoin is UTXO-based, which means that UTXO is spent as a hole, not all of your wallet's balance. That would ruin your privacy and increase transactions' sizes. Your wallet's balance is the sum of all of your UTXOs.

Read: https://learnmeabitcoin.com/technical/utxo

This is because anyone with an internet connection can access the blockchain and thus view your transaction and know your balance, but if the remaining BTC balance was sent to your change address, one cannot simply conclude that it is the change address or the recipient address.

They can conclude it, if say they're the merchant. But, everyone else who's watching the chain can't prove it's yours.

[witcher_sense]

We all know that UTXO (Unspent Transaction Output) can be defined as the total balance in your Bitcoin wallet, which includes both the balance in your receiving address and the balance in your change address.

We all know that the total balance shown in your bitcoin wallet is the sum of ALL UTXOs that a bitcoin wallet can spend with the private keys it controls. The wallet displays the balance as one number only for the convenience of users, this information is not used anywhere else.

A Bitcoin Change address is an address that will receive your remaining Bitcoin after you have spent some of your Bitcoin Balance.

A Bitcoin Change address is an address that was created by my wallet automatically (it has a special derivation path which describes how to generate it from a particular random key), but I can also specify manually which addresses I want the leftover to be sent. For example, I have one UTXO of 5BTC and I send you 3BTC. The remaining 2 BTC could be sent to whoever I choose, not necessarily to an address created by my wallet. I could send it directly to an exchange, for example.

[Charles-Tim]

Let me simplify it further for you.

For example:

Mr A sent you 1BTC
Mr B sent you 2BTC
Mr C sent you 3BTC

1BTC + 2BTC +3BTC = 6BTC

That means you can have 3 inputs if you want to make transaction (Mr A, Mr B and Mr C coins sent to your address) of 6 BTC of UTXO

Assuming you want to transfer the whole 6 BTC to MR D, that means you are spending the whole 6 BTC of UTXO as 3 inputs as you received the 6 BTC in 3 different transactions.

If  Mr A, B and C sent the coins to different addresses generated on your wallet, that means the 3 addresses can be know on the blockchain after you spent the 6 BTC, they will be seen as inputs that belong to addresses generated on the same wallet with seed phrase, seed or master private key.

You are though not wrong if only the wallet has 1 input of 5 BTC, it means the bitcoin wallet only receives 1 input (like only Mr A sent you 5 BTC) to spend from. If you transfer 3 BTC, then 2 BTC will be sent to your wallet change address.

To maximize your privacy, know that wallets that automatically select UTXO as the input can select it in a way many addresses can be connected together, you can use coin control on wallets like Electrum to manually select the certain input of your choice. You can even manually select the change address of your choice.

But what should more noticed is that most bitcoin wallet have no coin control and they select inputs in a way many addresses can be linked together.

They can conclude it, if say they're the merchant. But, everyone else who's watching the chain can't prove it's yours.

Exactly. But the worst aspect of this is when many addresses are linked together as inputs which can be seen on blockchain explorer. The output can be a guess but the input is not a guess, it is definite.

[Hyphen(-)]

Bitcoin transactions are sent as a hole, which means that if I have 5 BTC in my wallet (A), which is my UTXO, and I want to send out 3 BTC to another Bitcoin wallet, the transaction will use my entire 5 BTC in my wallet (A).

No, unless your wallet has only one UTXO. Bitcoin is UTXO-based, which means that UTXO is spent as a hole, not all of your wallet's balance. That would ruin your privacy and increase transactions' sizes. Your wallet's balance is the sum of all of your UTXOs.

Read: https://learnmeabitcoin.com/technical/utxo

This is because anyone with an internet connection can access the blockchain and thus view your transaction and know your balance, but if the remaining BTC balance was sent to your change address, one cannot simply conclude that it is the change address or the recipient address.

They can conclude it, if say they're the merchant. But, everyone else who's watching the chain can't prove it's yours.

The recommendation and the corrections will be properly taking into consideration, although it's just a trial, but more of research will be made to make amendment in any of my posts. I appreciate 🙏

[bitmover]

They can conclude it, if say they're the merchant. But, everyone else who's watching the chain can't prove it's yours.

Exactly. But the worst aspect of this is when many addresses are linked together as inputs which can be seen on blockchain explorer. The output can be a guess but the input is not a guess, it is definite.

One good way to try to "mask" the change address is by avoiding sending round numbers.

For example, lets suppose you received 0.5 BTC from someone.

if you need to pay someone 0.1 BTC. You will have 2 outputs in the transaction and the fee (0.00000227), like this:

Code:

                         ┌──────► Address B(0.1BTC)
                         │
                         │
                         │
Wallet A (0.5BTC)─◄───────►│
                         │
                         │
                         │
                         └──────► Address C(0.39999773BTC)
Fee: 0.00000227

Address C is most probably the change address.

Wallets such as electrum allows you to use multiple change addresses, which will increase your privacy.
You can also check enable output value rounding so you round change addresses to increase your privacy, using more satoshis in fees.

[tranthidung]

One of ways to check privacy of transactions is Blockchair.com's Privacy o meter

• Check it there https://blockchair.com/bitcoin/privacy-o-meter
• Read Guideline for more details

Example transaction: https://blockchair.com/bitcoin/transaction/f73719840e35d4e2289ad71678530f1af7a69133455fda361e168c88d144c7e5
I randomly picked that transaction on the explorer. If you want to check yours, use it with Tor browser if you don't want to leak your IP address that will lead to other things.

[Charles-Tim]

One of ways to check privacy of transactions is Blockchair.com's Privacy o meter

I can say that is true, but I can also easily say that people that are privacy conscious already know the way to go to have privacy even without the privacy o meter. If centralized server is truly included as part of what privacy o meter Is using to give percentage of the extent of privacy a transaction is, this is beyond what is in the OP which is how people can not make use of blockchain explorer to link many addresses generated by the same wallet together which is the importance of using change address.

I am not at all disputing privacy o meter, ways to privacy is beyond just one, it includes not getting verified on exchanges or wallet, it also includes how inputs are spent and also very important to take note of the SPV wallets which are light clients that have no option than to connect and sychronize with the blockchain by the help of central server. The central server can connect addresses generated by the same wallet together, link IP address(es). If the IP address is linked to the bitcoin addresses on the same wallet and also addresses linked together, then there is no privacy at all.

The only way someone can begin to have privacy is to run his own node, not relying on (using) IP address but instead using Tor. Not relying on centralized exchanges, wallets and other services that will request or later forced someone to provide KYC. Then, the use of wallet features like address freeze, coin control, using another recipient address as a change address (but not change address but as a means to use one stone to kill two birds) to fully spend an input will be additional means of maintaining privacy.