What is a UTXO?
The technical term for "pieces" of bitcoin that can be spent. Your wallet balance is the sum of all UTXOs you control.
Why It Matters
UTXOs demystify how Bitcoin actually works under the hood. Bitcoin doesn't track account balances the way a bank does. It tracks UTXOs. Unspent outputs from previous transactions.
Your wallet balance is the sum of all UTXOs you control. When you send bitcoin, you select UTXOs to spend as inputs and create new UTXOs as outputs. Transaction history matters because spending a UTXO requires proving you created it in a previous transaction and haven't already spent it elsewhere, which is the mechanism that prevents double-spending without requiring any central authority to keep account balances in sync.
How It Works
Bitcoin's ledger is structured as inputs and outputs. Not account balances. When you receive bitcoin, a transaction creates a UTXO with your address on it. That UTXO can be spent once and only once.
When you spend, the UTXO becomes the input to a new transaction. That transaction creates new UTXOs. Your wallet's balance is the sum of all UTXOs you can unlock with your keys. Because each UTXO can only be spent once, Bitcoin prevents double-spending: the same UTXO can't appear as an input in two valid transactions. When your wallet sends a payment, it selects UTXOs totaling at least the sending amount, spends them, and creates output UTXOs to the recipient and back to yourself as change.
A worked example. You have 0.5 BTC in your wallet. That balance is actually three UTXOs: 0.2, 0.2, and 0.1 BTC from three different past transactions. You want to send 0.3 BTC to a friend. Your wallet picks the two 0.2 BTC UTXOs as inputs, totaling 0.4 BTC. It creates two new outputs: 0.3 BTC to your friend and 0.099 BTC back to you as change. The 0.001 BTC difference is the transaction fee claimed by the miner who includes the transaction in a block. The original 0.2 BTC UTXOs no longer exist. Your wallet now shows two UTXOs: the 0.1 you didn't spend and the 0.099 change.