UTXO stands for Unspent Transaction Output. It is how Bitcoin actually tracks money. There are no account balances on the blockchain, only individual chunks of bitcoin waiting to be spent.
Think of banknotes
Imagine your wallet contains a 50 and a 20. To pay 60, you hand over both and get 10 back in change. Bitcoin works the same way. Each UTXO is like a banknote of any size, locked to a particular address.
How a transaction works
A transaction takes one or more UTXOs as inputs and destroys them. It then creates new outputs: one for the recipient and usually one for your change. The difference between total inputs and total outputs is the fee paid to the miner. Each input must carry a valid digital signature proving you control it.
Your "balance"
When your wallet shows a balance, it is adding up all UTXOs that your keys can spend. Every node keeps a database of all current UTXOs, known as the UTXO set, which makes checking for double spending fast. If an input is not in the set, it has already been spent, and the transaction is rejected.
Why this design?
Simple verification: each coin can be checked independently.
Parallel processing: transactions that spend different UTXOs do not conflict.
Privacy options: using fresh addresses for change makes tracking harder than in an account-based model, although chain analysis can still link many coins.
Practical tips
Many tiny UTXOs ("dust") can be expensive to spend later, because fees depend on transaction size and each input adds size. Some wallets offer "coin control", which lets you choose exactly which UTXOs to spend for better privacy and lower fees.