You might think that just because a crypto asset has a low price, it’s a better buy than one with a higher price. While this can be true, it isn’t always the case. To understand why, it’s important to understand what unit bias is.
The term unit bias was coined in 2006 and originally had nothing to do with investing. It initially referred to the idea that humans like to consume food or engage with a task in smaller, whole-number increments. For example, someone might think one slice of pizza is an appropriate portion of food to eat or one mile is an achievable distance to run.
Crypto investors experience unit bias as well, yet in a different way. When newcomers to the crypto space see the price of one Bitcoin (BTC) or Ethereum (ETH) token, they sometimes feel dissuaded from purchasing these assets, because they may not have enough money to purchase a full coin.
So when we review a list of top cryptos and see that a token like Cardano (ADA) costs less than $1 as of May 2022, we may be more inclined to buy it. But the lower price point isn’t necessarily an indicator that the crypto’s price has room to rise. While this may end up being the case, it will have had nothing to do with the token’s price.
When choosing which digital asset to invest in, it’s essential to conduct a fundamental analysis of the asset. Fundamental analysis includes looking at the price history of the asset — in other words, are you buying high or low? — researching the founder’s vision and road map for the project, and, perhaps most importantly, looking at the market capitalization — or market cap — of the asset.
Market cap shows a crypto asset’s value as determined by investors. In other words, market cap shows how much investors believe a crypto asset is worth.
Here’s the formula for determining the market cap of a crypto project:
(number of coins or tokens) x (price of a coin or token) = market cap
The market cap of an asset is an indicator of how stable the asset is. The prices of cryptos with a higher market cap are more stable than those with a lower one. You can quickly and easily find the market cap of crypto assets on CoinGecko.
Using market cap as the primary indicator, buying a small fraction of BTC is a more prudent investment than buying a whole Shiba Inu (SHIB) coin. BTC’s price may not rise as quickly as SHIB’s, but it likely won’t fall as quickly either. And while we’re on the topic of SHIB…
In the crypto bull market over 2020 and 2021, dog coins stole the stage for a while. “DOGE to a dollar” became a popular meme as Elon Musk led the Dogecoin (DOGE) charge while the crypto market was hot. In the first half of 2021, the price of DOGE surged dramatically, even compared to the prices of bigger digital assets like BTC and ETH, which also surged over the same period.
In the wake of DOGE came SHIB’s surge in price. People weren’t buying these coins just because of the cute dogs on them, but because they were cheap. One DOGE cost less than 1 cent in December 2020, while one SHIB cost $0.00000000006 around the same time. Many crypto speculators decided that buying about 16 billion SHIB tokens for $1 felt like a better bet than buying about 0.00004 of a BTC.
While DOGE and SHIB saw dramatic price increases in 2021, they’ve also seen dramatic price decreases since. The same can be said for most other altcoins.
So, if you’re new to the crypto space and looking to make more prudent investments, you may want to avoid getting caught up in the type of meme coin hype that surrounds tokens like DOGE and SHIB, and reconceptualize purchasing fractions of cryptos with larger market caps, like BTC.
Each Bitcoin is made up of 100 million units, informally known as Sats. “Sat” is short for Satoshi, the first name of Bitcoin’s founder, Satoshi Nakamoto.
As of mid-May 2022, one Sat costs about $0.0003. Another way to say this is that $1 can currently buy you about 3,333 Sats. (Use our Satoshi-USD calculator to keep up with the value of your Sats.)
Because whole Bitcoins have become so expensive, many have adopted a “stack Sats” crypto investment strategy. Stack, in this case, is slang for acquire or buy.
Given that we’re all susceptible to unit bias, keep in mind that we can always carve larger units up into smaller ones. Just as you’re likely to attempt a 5K before trying to run a marathon, you can buy Sats instead of trying to save up enough dollars to buy an entire Bitcoin or another digital asset with a cheaper price per coin.
When crunching the numbers before making an investment, look further than the price of the digital asset in which you’re interested in buying.
Buying cheaply priced cryptos may seem like a good idea on the surface level, and it may even pay off in a given time frame. But crypto price isn’t a gauge of its potential success.
The market cap of a crypto project is a better number to look at as compared to token price when assessing how risky your potential crypto investment is.
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