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unit bias
Psychology plays an important role in all financial sectors (the Keynesian beauty pageant is a great example), and cryptocurrencies are no different. An important area of psychological study in finance is bias, because bias often leads people to make poor financial decisions. cryptocurrencies have introduced a new bias in finance, the unit bias. unit bias exists in other forms, but in crypto it means that people prefer to own whole units of a cryptocurrency rather than parts of a single one.
There are two misconceptions related to unit bias.
Reading: Can you buy less than 1 bitcoin
- having a whole coin is better than having a piece.
- having many coins is better than having only one.
humans are predisposed to like whole things. Would you rather have a handful of $10 worth of change or a fresh $10 bill? how would you feel if a waiter brought you a drink in a glass 3/4 full, not near the top as usual? it is important to recognize the dissatisfaction that people feel with fractions. it’s true that seeing “2.0 eth” in your bitcoin.com wallet balance is probably more satisfying than seeing “0.400515 btc”, although that amount of bitcoin is worth considerably more in dollar terms.
the second point is based on the first. if two things are similar, then having too much of one is more valuable than too little 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 apples). in the digital realm, our physical-based intuition can be easily exploited. many cryptocurrency projects create coin supplies in the trillions. a modest sum of dollars is capable of buying millions of these coins. then it’s easy to jump 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 getting the same result.
As counterintuitive as it sounds, the truth is that the number of coins you have, whether it’s millions or a fraction of one, doesn’t matter at all. it is not important because the way coins are counted or denominated is variable. the 0.400515 btc you have could be denominated in a way that makes it feel complete and much bigger.
We change the name of articles all the time without thinking. we call big-ticket items like houses in thousands of dollars, or millions: “new house for sale is $450k, but my dream house is $1.5 million”. we call 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 is $1.50.”
how can we denominate 0.400515 btc?
bitcoin denomination: btc or sats?
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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 Satoshi or Sati, after the pseudonymous creator of Bitcoin, Satoshi Nakamoto. How much is a satoshi worth? Let’s compare it to the dollar:
A penny 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 amount of unwieldy bitcoin above (0.400515 btc) would be about 40 million satoshi. Just for fun, at the time of this writing, 2.243 billion satoshi equals roughly $1 million.
In the early days of bitcoin, when it was worth less than a dollar, the idea of needing eight decimal places of granularity was laughable. Now that bitcoin is worth tens of thousands of dollars, and major traditional banks are predicting it could be worth six figures, the need for satoshis is starting to make sense.
as a bitcoin is worth more, the use of whole bitcoins becomes less useful to relate to elements of normal life. a bitcoin worth $40,000 is unwieldy to relate to the cost of a cup of coffee (at the time of writing, about 0.00009000 btc). in this case, satoshi is more human readable. therefore, the coffee would be “nine thousand satoshi”. As bitcoin price rises, satoshi will become more readable. it will make more sense to move from talking about bitcoin to satoshi, at least for daily articles. expensive items would lend themselves more to being denominated in bitcoins, “new house for sale is 2.5 bitcoins.”
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the important thing to note is that whether you use bitcoin or sats, they refer to the same thing.
calculating profit and loss
A common practice for people new to crypto is to calculate profit or loss from the total 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 from $1,000 to $11,000, but you have 0.1 btc, you haven’t made a profit of $1,000, because you don’t have a whole bitcoin.
if you own a whole bitcoin, when the price of bitcoin rises $1,000, if you sell at that time, you will have earned $1,000. however, if you only own 0.1 btc, then you have only earned a fraction of that.
if you have 1 bitcoin, your profit is $1000.
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 cryptocurrency. that way you can simply take how much you invested in the cryptocurrency and multiply it by the percentage change.
for example: you bought $200 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.
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