Why newbies assume you have to buy a whole bitcoin
- Bitcoin's division of units
- Money as a unit of account
- Why thinking about Bitcoin in smaller units is a struggle
- The historical baggage of fiat money's language
One of the most common questions asked by someone entirely new to crypto is ‘Do you have to buy a whole bitcoin?’ The answer is of course, no, but digging into why this is such a common misconception can help explain why any transition to bitcoin as a unit of account may be some way off.
Each bitcoin is divisible into 100 million smaller units known as satoshis – named after the asset’s shadowy creator. Bitcoin was fractionalised in this fashion in order that its monetary supply could cope with increased adoption. Thus, you can technically own 0.00000001 BTC and still be a bitcoin holder.
Money as a Unit of Account
Bitcoin monetary units are at odds with our experience of using physical money, which is only available in a few specific units - also known as denominations. That in turn drives how retailers price goods, either using units or round numbers that are aggregates of units. This makes it as easy as possible to understand and compare cost/value e.g ‘Get two for €10’ - or to use what is called ‘price rhetoric’.
Price rhetoric is pricing goods just under those psychologically important units or round numbers, so as to appear to present better value. Something priced 'Just €4.99’ sounds a lot better than €5 even though the difference is inconsequential.
All this means that most people are used to fiat money’s role as a unit of account being communicated in a very specific way. Especially boomers who still have a relatively strong connection to physical money.
The term unit of account is one of three core functions that defines money. The other two are medium of exchange and store or value.
Money’s function as a medium of exchange is as an intermediary for the exchange of goods and services. It is the cornerstone of trade; without it we would either have to barter, or hold mental credits of things we had exchanged - which is actually how trade worked before forms of money were first employed. There is no historical evidence for barter.
Money’s function as a store of value is to literally preserve, through space and time, the energy we have expended in making or doing things . That might sound a little abstract, but life for most people revolves around generating wealth, and either exchanging that created wealth as money (for things we need on a short term basis), or keeping it for the proverbial rainy day.
If you are keeping your wealth for use in the future, you want its value to be preserved; that is the quality that a store of value describes.
Though those two functions might take a bit of explaining, they aren’t that alien to the average person. You could really dumb them down to spending/receiving and saving, to get the point home.
The challenges of Bitcoin as a true unit of account
When you make the jump to cryptocurrency, like bitcoin, you are still using money, which means it should still satisfy the three core functions. Being able to exchange it for goods and services, rely on it to hold its value and function as a unit of account.
And if that makes sense for the money you are used to, then you should be able to get your head around how new virtual currencies can provide the function just as well.
The difficulty with the unit of account function of money, and why so many newcomers think you have to buy a whole bitcoin, is because the way we think about units of money and prices is a throwback to way before money was only ever anything but different sized coins.
There are six key characteristics that money should provide as a medium of exchange:
- fungibile
- divisibile
- portable
- recognisable
- durable
- scarce
The first four explain why coinage developed, because they were a way to try break money into convenient units (divisible); that were interchangeable and of equal value (fungible); relatively easy to carry around (portable); and clearly recognisable through their natural qualities or the ability to emboss insignia.
The history of common monetary units
The naming conventions, and different divisions of coins - denominations - were originally based on weight, which is what determined value. England’s currency, for example, is the Pound, abbreviated from Pound Sterling.
The name derives from Latin, poundus, meaning weight. It was a recognised unit of currency as far back as 775AD where in Anglo Saxon England it was equivalent to one pound weight of silver. The words lira and baht also relate to weight.
The dollar symbol is believed to be derived from the P symbol used for Peso, which means weight in Spanish. because it was minted with a specific amount of silver. The English referred to it as Pieces of Eight because a silver Peso was worth eight Reals.
Once money transitioned to paper notes, to improve the portability aspect and make it safer to transport large sums, that literal meaning was eroded.
Most of the names we give to the different coins and notes we use today relate to shortcuts for understanding their value, but as they aren't made from a precious metal, or even backed by one (the Gold Standard was finally abandoned by the US in 1971) they don't relate to weight any more.
This connection was further broken as we started using money digitally, so the physical recognition aspect and need to price in amounts that make practical sense diminished; nevertheless we still use familiar units of pricing because that norm still persists.
It makes logical sense for a new digital form of money - such as Bitcoin - that doesn't have that history, to adopt a unit system ready for mass adoption and suitable for micropayments. That's why it is fractionalised to eight decimal places, the problem is that it is being introduced alongside the existing system, with its very analogue roots, and people aren't always logical when it comes to money.
Our article on crypto unit bias looks at why people are irrationally focused on owning whole units of coins above fractions, rather than considering underlying value. That is another aspect of our cultural ties to distinct units of existing money.
Literally all discussions about Bitcoin's value happen using existing fiat money as a benchmark. We aren't ready to consider it as a unit of account in its own right.
When you realise how heavy the historical baggage of money is, and how we expect money to have discrete values, it should be less of a surprise, that when people are presented with a new magical internet money that isn't bound by the restrictions of the physical world, that one their first questions is ‘So do I have to buy a whole Bitcoin?’