Unit bias

Psychology plays an important role in all financial sectors (the Keynesian beauty contest is a great example), and cryptocurrencies are no different. An important area of psychological study in finance is biases, because biases often lead people to make poor financial choices. Cryptocurrencies have introduced a new bias into finance, unit bias. Unit bias exists in other forms, but in crypto it means that people prefer owning whole units of a cryptocurrency rather than pieces of one.

There are two misconceptions bundled into unit bias.

1. Having a whole coin is better than having a piece.
2. Having many coins is better than having one.

Humans are predisposed to like whole things. Would you rather have a handful of change equal to 10 dollars, or a crisp 10 dollar bill? How would it feel if a waiter brought you a beverage in a glass 3/4ths full, not near the top as usual? It's important to acknowledge the dissatisfaction with fractions people feel. It is true that seeing “2.0 ETH” in your Bitcoin.com Wallet balance is probably more satisfying than seeing “0.400515 BTC,” even though that amount of bitcoin is worth considerably more in dollar terms.

The second point builds upon the first. If two things are similar, then having a lot of one of them is more valuable than having a few of the other. In the physical world this makes sense. Most people would agree that having 10 apples is better than having five oranges (unless, perhaps, you like oranges twice as much as you like apples). In the digital realm, our physical-based intuition can be exploited easily. Many cryptocurrency projects create coin supplies in the trillions. A modest sum of dollars is able to purchase millions of these coins. It’s easy then to leap to conclusions like, “if this coin goes to 50 cents, I’ll have a million dollars!” This seems more feasible than your 0.400515 BTC netting the same result.

As counter-intuitive as this may seem, the truth of the matter is that the number of coins you have, whether that be in the millions or a fraction of one, is not important whatsoever. It’s not important because the way coins are counted, or denominated, is changeable. The 0.400515 BTC you have could be denominated in a way that makes it feel whole, and much bigger.

We change the denomination of items all the time without thinking. We denominate big ticket items like houses in thousands of dollars, or millions: “The new house for sale is $450k, but my dream house is $1.5 million.” We denominate a romantic date in tens of dollars: “Movie and dinner was about 80 dollars.” A vending machine might be denominated in dollars and cents: “This soda costs $1.50.”

How can we denominate 0.400515 BTC?

Bitcoin denomination - BTC or sats?

The smallest denomination of Bitcoin is not 1 BTC, just like the smallest denomination of dollars is not 1 dollar. The smallest retail denomination of dollars is 1 cent. The smallest denomination of Bitcoin is 1 satoshi, or often shortened to sat, both are acceptable. It is called a satoshi or sati, in honor of the pseudonymous creator of Bitcoin, Satoshi Nakamoto. How much is a satoshi worth? Let’s compare it to the dollar:

One cent is one hundredth of a dollar. Put another way, it takes 100 cents to make 1 dollar.

100 cents == 1 dollar

1 satoshi is much smaller, it is one hundred millionth of a bitcoin. It takes 100 million satoshi to make 1 BTC.

100,000,000 sats == 1 BTC

The unwieldy bitcoin amount from above (0.400515 BTC) would be about 40 million satoshi. Just for fun, as of this writing, 2.243 billion satoshi is about 1 million dollars.

In Bitcoin’s early days, when it was worth less than a dollar, the idea of needing eight decimal places worth of granularity was laughable. Now that Bitcoin is worth tens of thousands of dollars, with major traditional banks predicting it could be worth six figures, the need for satoshis starts to make sense.

As one bitcoin becomes worth more, using whole bitcoins becomes less useful for relating to normal life items. A bitcoin worth 40,000 dollars is unwieldy to relate the cost of a cup of coffee (at the time of this writing, about 0.00009000 BTC). In this case, satoshi is more readable for humans. Thus, the coffee would be “nine thousand satoshi.” As Bitcoin’s price increases, satoshi will become more readable. It’ll make more sense to switch from speaking about bitcoin to satoshi, at least for daily items. Big ticket items would lend themselves more to being denominated in Bitcoin, “The new house for sale costs 2.5 Bitcoins.”

The important thing to keep in mind is that whether you use Bitcoin or Sats, they are referring to the same thing.

Calculating profits and losses

A common practice for people new to crypto is to calculate profit or loss from the whole dollar amount of the coin. Some people have difficulty understanding how to calculate their profit or loss if they have less than one coin.

If BTC is worth $10,000 and the price increases $1,000 to $11,000, but you have 0.1 BTC, you have not made a $1,000 profit, because you do not have one whole bitcoin.

If you own a whole Bitcoin, then when Bitcoin’s price increases $1,000, if you sell at the time then you have made $1,000. However, if you only own 0.1 BTC, then you have only made a fraction of that.

If you have 1 bitcoin, your profit is $1,000.

If you have 0.5 bitcoin, your profit is $500.

If you have 0.1 bitcoin, your profit is $100.

A more useful metric to use is the percentage change in the cryptocurrency. That way you can simply take how much you put into the cryptocurrency and multiply it by the percent change.

For example: You bought $200 dollars worth of Bitcoin at a price of $10,000. Bitcoin is now worth $20,000, a 100% change. Your $200 dollars is now worth $400.