Do you suffer from crypto unit bias?
- What is crypto Unit Bias
- How psychology influences investing
- Unit Bias in action
- Ignoring your gut instincts
Bitcoin started out as a nifty but ostensibly worthless asset changing hands among developers and cryptographers. Its value has since increased by over a 1 million percent, and though credible predictions expect that to continue, many casual investors hold the irrational view that BTC is simply too expensive, which is down to something called unit bias.
It’s difficult to fathom now, but owning a single unit of bitcoin back in the early days meant, well, nothing. On the contrary, those who parted with paper money for the privilege of “owning” a so-called virtual currency were dubbed gullible fools. Owning one, ten or even 500 bitcoin wasn’t a big deal – it was a sign of delirium.
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These days, it’s a different story. Assuming some Black Swan event doesn’t cause BTC to plummet in value, most citizens have no realistic prospect of ever owning one whole bitcoin. The current address distribution shows that only 2.2% of Bitcoin addresses own more than 1 BTC,
Bitcoin wealth may not be quite as unequally distributed as the image above shows. Glassnode explain why in a great blog post with the biggest issues being that address is not an account and so many users store their coins on exchanges. Nevertheless, the casual bitcoin holder's best bet is to “stack sats” – to save as best they can in a bid to own 0.2 or 0.5 BTC. Cost averaging is a great way to do that.
This fact nourishes the view that regular people have been priced out by those early adopters and those with the resources to invest at much higher nominal price – hedge funds, corporations and deep-pocketed investors.
It shouldn’t matter whether you own a whole unit or half a unit providing both have monetary value (0.5 BTC might just be worth half a million dollars in five years), and the potential appreciation doesn’t have an upper bound. Nevertheless, crypto unit bias afflicts many novice investors, who feel that owning a whole Bitcoin is psychologically important and therefore the asset is too expensive, so turn their attention to alternative, affordable cryptocurrencies instead. So what drives this kind of thinking?
How Psychology Influences Investment
Behavioural finance is a branch of study dedicated to the role psychology plays in market outcomes. Although often regarded as a relatively recent discipline, the economist John Maynard Keynes highlighted the importance of psychology in economics in the mid ‘30s.
In 2011, researchers at Santa Clara University applied behavioural finance concepts to the 2008 Financial Crash and concluded that several types of bias led investors to make unsound decisions. One example was availability bias, wherein investors “overweighed” nuggets of information that were easier to memorise, while underplaying equally important data that proved harder to retain.
Further forms of behavioural bias included hindsight bias, which led Wall Street strategists and their clients to believe markets were beatable once expertise was applied, and confirmation error, wherein executives searched “for evidence confirming their rosy assessments of the subprime markets and ignored disconfirming evidence gathered by their own analysts.”
Crypto Unit Bias Is Behavioural Finance in Action
Just as aspirations for wealth and glory made bankers blinkered about the risks of issuing or holding mortgages and mortgage securities in 2008, crypto unit bias blinds many investors to the risk of, say, buying and hodling a sketchy altcoin with no long-term prospects. All because the investor can buy hundreds or even thousands of units cheaply.
This sort of psychology was on display when KISS bassist Gene Simmons took to Twitter to explain his reasons for buying Cardano (ADA). Although Cardano is a top five cryptocurrency in his own right, with a market cap of $37 billion and an impressive technical team guiding it, Simmons’ justification came back to good old crypto unit bias.
This statement touches upon another pillar of crypto unit bias: the implication that one cannot afford bitcoin because they don’t have the means to purchase a whole unit. This one of the biggest misconceptions of Bitcoin.
Curiously, this bias does not tend to affect gold buyers: if one cannot afford one whole gold bar, they are just as likely to buy gold coins, gold jewellery, gold-backed exchange traded funds (ETFs), even gold-backed digital assets.
If Bitcoin Is Money, Less Than One Is Too Close to Zero
Perhaps unit bias in crypto related to our perception of money. Bitcoin is often described as a better form of currency, the money of the future, so it’s natural for this bias to creep into our thinking.
While every penny counts for those of modest means, many people regard anything less than a dollar (or a pound or a euro) as “loose change” or “shrapnel.” And this impression is strengthened by a general rise in prices in our economy.
If anything less than one unit can’t buy very much, we don’t assign value to it. It was this perceptional blind spot that Wolf of Wall Street Jordan Belfort exposed when promoting penny stocks to eager investors – the low-cap, lightly regulated securities that don’t trade on a major stock exchange.
Belfort’s unscrupulous peddling of seemingly cheap penny stocks – which he foisted on investors at inflated prices – eventually landed him in jail, though he enjoys something of a cult status nowadays thanks to the film’s success.
A Common Psychological Flaw
Ultimately, crypto unit bias is a psychological flaw: one with the potential to impair your critical thought process when sizing up an investment decision, be it in crypto or anything else.
Although sub-$1 altcoins are enticing, it’s crucial to evaluate assets on their merits, including their tokenomics, developer team, originality, liquidity, and circulating supply. Strip unit bias out of the equation and those dirt cheap coins might start to look a lot dirtier than they do cheap. We delve further into Fundamental Analysis in our knowledge base.
There’s nothing wrong with investing in altcoins, and it’s possible to outperform bitcoin and profit handsomely from doing so. Just don’t make the mistake of confusing price with value. 1 bitcoin might be expensive, but 10,000 sats are highly affordable. And anything you can do with 1 BTC, you can do with fractions of a coin too. With 100 million sats per coin, there’s enough bitcoin for everyone to claim their share of digital gold.