Will my testicles shrink while I take the testosterone pellets?

Yes, they will to some extent. Testicles shrink normally with age, as they provide less and less testosterone. As the pellets take over the supply of testosterone, testicles are not producing as much as usual, so they get smaller. This is not a permanent change, and there are medical methods to stimulate the testicular size, but it is cosmetic and not necessary to be healthy.