Cognitive bias reduces users’ desire to buy. It’s time for bitcoin to embrace a new unit
Split Bitcoin tokens launch on Ethereum may be easy to use.
The revelry of cryptocurrencies in the latest bull market reached its peak in May. At the time, the most attention-grabbing tokens were several meme currencies, which grew massively as countless new users poured in. Apart from the attractive icons and various memes, the key reason for the success of the meme currencies — represented by the “zoo” coins — was their low-seeming prices. The SHIB community created a simple but effective slogan — “Eat zero”. Every zero removed represented a tenfold rise, and even CCTV reported that the value of SHIB had risen by 280,000-fold in half a year.
The low-priced altcoins brought a huge amount of fresh blood into the cryptocurrency market within one week in May, but at the same time, the performance of bitcoin remained unremarkable. When newcomers tried to get started with bitcoin, they might have asked “How much is one bitcoin?” But when they found out that each bitcoin was worth over $50,000, they just said “that’s too much, I can’t afford it” and returned their attention to the $0.00001 SHIB.
When bitcoin’s performance started experiencing a correction, these coins that had risen through the “eat zero” movement started to fall again. After the tide retreated, cryptocurrencies represented by bitcoin started being accused of “picking users over and over like leeks”. Bitcoin is like the Moutai of stocks: its value is indisputable, but its expensive unit price deters many investors so that the asset most worth owning long-term is no longer the one that attracts the interest of new users.
When talking about the actual use, bitcoin is also restricted in small-value transfers because of its overly high value. The following example might occur frequently if BTC is being used in our daily life.
A: I owe you $100. Let me give it to you in bitcoin.
B: Okay, give me 0.00028BTC then.
B: Oh, that’s wrong, it should be 0.028 BTC.
A: Oh, all right.
B: Wait, I think it should be 0.0028BTC.
When there are over three digits behind the decimal point, conversions between price and amount start to become difficult, and errors appear easily. If there could be a middle product whose overall value was the same as bitcoin, but which had a lower price, conversion issues during transfers could be solved. Maybe this could be achieved through a smaller bitcoin unit.
Hard knowledge on bitcoin: there are different units apart from “BTC”
If you access a blockchain browser for bitcoin, like Blockchain.com, and randomly open a transaction, you can see something like the screenshot below. This transaction includes one input of 0.32050769 BTC and two outputs of 0.00217505 BTC and 0.31820889 BTC respectively, while the remaining 0.00012375 BTC was sent to miners as a transaction fee. We can see that the default unit displayed during input and output is BTC, but another unit was used for the calculation of the transaction fee — sat.
“sat” is short for “Satoshi” and is the smallest division of bitcoin. Because the value of inputs and outputs are normally larger, it is more convenient to use BTC as the unit. But when calculating transaction fees, these fees are equal to the byte count of the transaction multiplied by the bid price of each byte. As the picture above shows, the miner fee of this transaction is equal to 55 satoshi/bytes x 225 bytes = 12375 satoshi = 0.00012375 BTC. If the bid price were calculated in BTC instead, this would be 0.00000055 BTC/byte, which would be more complicated to display.
We can see that in the on-chain transactions of the bitcoin network, it is conventional to use the smaller unit, like sats, for smaller quantities of bitcoin.
Apart from satoshi, other common units are cBTC, mBTC, μBTC, and bits. Their conversion ratios are as follows:
1 cBTC = 0.01 BTC
1 mBTC = 0.001 BTC
1 μBTC = 1 bits = 0.000001 BTC
1 satoshi = 0.00000001 BTC
As early as 2013, many bitcoin communities called to adjust the usual units of bitcoin, and bits were the most popular choice among these units. In 2014, BitPay chose to support bits as a common unit, followed by Coinbase, Jifu Wallet, and Bixin Wallet. Up to now, there still are some exchanges where users can select bits as the unit for the display of prices, but this is not widespread.
Price can lead to a certain kind of “Cognitive Bias”, and splitting may attract investors
When mature investors are considering an investment, they make an overall evaluation based on metrics such as its marketcap and circulation volume. But most newbies do not have enough time and professional knowledge to carry out careful research. What they can directly see in exchanges is the price, so it is easy to understand why they would feel that bitcoin is “too expensive” while SHIB is “very cheap”.
The conclusion that the display of prices has a large influence on consumers and investors is not just supported by facts but also has the theory behind it. One example is the “non-round number pricing method” that is often used when setting the prices of products. Consumers tend to think that a 998 RMB product is much cheaper than a 1000 RMB one and assume that a four-digit number is much bigger than a three-digit one. Similarly, the current BTC unit causes users to fall into this kind of cognitive bias, significantly reducing their desire to buy the coin.
This is also why newcomers are more willing to buy cryptocurrencies whose price is far below $1 — these altcoins seem “cheaper”, and the number of coins they can get with the same amount of money seems to be “much more”.
In fact, the traditional finance market also uses the splitting method to attract investors. When the price of a stock is too high, companies would use a stock split to issue additional shares to all shareholders based on the existing ratio of shares they hold. After splitting, the market price of each share decreases, and the capital needed to buy that share decreases correspondingly, thus increasing the circulation of the stock and the number of shareholders.
In the practice of stock trading, differences between the price displayed and the turnover are also used to attract investors: the price displayed is often much smaller than the actual turnover. For instance, in China’s stock market, the price of each Kweichow Moutai stock is shown as 2,000 RMB, but the minimum quantity for each transaction is 100, and the transaction quantity has to be an integer multiple of 100 stocks, meaning that you need to have at least 200,000 RMB to buy Moutai stocks. Imagine how many investors would be scared off if the minimum cost of 200,000 RMB were to be directly displayed as the price.
Since the price display rules of exchanges cannot be changed, we can also use methods such as splitting to change the value of each coin, making the prices more acceptable to newcomers. Many projects have used this method to attract the attention of investors. In July 2020, Polkadot agreed through voting to divide DOT by 100. Recently, YFI has also issued a WOOFY token that can be exchanged with YFI, where 1 YFI = 1,000,000 WOOFY. YFI is a less popular token whose unit price is the same as BTC, but after being split, it is more convenient for small investors to buy it.
Why does bitcoin also need to be split?
Bitcoin is known as digital gold, but gold is also used in different places with different units. For instance, ‘tons’ are usually used on the level of national reserves; China’s public gold reserves are about 1,800 tons, but one gold bar might be 1,000 grams, and a gold necklace might only be a few grams.
But BTC is the only common unit for bitcoin, and based on the conventions of the cryptocurrency market, regardless of the price of the coin, the exchange always displays the unit price of each coin, creating the illusion of expansiveness or cheapness.
On the cryptocurrency market, bitcoins have the highest market value, the best circulation, and the strongest consensus. After over 10 years of development, the price of one bitcoin has reached tens of thousands of U.S. dollars, and even the smallest “satoshi” unit exceeds the currencies of many nations in value, such as the Iranian rial, the Sierra Leonean leone, the Uzbekistani so’m, and the Vietnamese dong.
Now that El Salvador has acknowledged bitcoin as legal currency and countries like Paraguay prepare to follow, and plans to expand bitcoin such as the Lightning Network are gradually maturing, the use of bitcoin in everyday transactions will become more frequent. Bitcoin may go from a tool for the storage of value to a “legal currency” that can be conveniently used for payment and transactions in realistic situations.
But with the current price of bitcoin, it may not be convenient to use it to pay directly. For instance, buying one cup of coffee may only cost 0.0001 BTC, while taking the train may only cost 0.00008 BTC. Users will have to repeatedly confirm how many decimal places there are during the payment process, and it will be very easy to make mistakes.
Directly splitting up the units of bitcoin is not easy either. Unlike Polkadot, Bitcoin does not have on-chain governance, so splitting up BTC like DOT was split up is clearly not possible. The split may only be done through a hard fork, which requires the whole ecosystem’s cooperation, and it is likely that current bitcoin holders would disagree, while miners may also not support this. But if a bitcoin-pegged token could be used as a “bridge”, and the split is only done to this bridge, it would be more realistic and would be more easily accepted by everyone.
DeCus is exploring splitting a bitcoin-pegged token
The decentralized cross-chain custody system DeCus is currently planning to release split bitcoin-pegged tokens. Their product will go live on mainnet in August, and the token minting and liquid mining will be kicked off at the same time. DeCus is a decentralized bridge that can build cross-chain assets. It allows custodians to safely undertake the custody work without over-collateralization. As the number of custodians increases, the collateralization rate of custodians will continue to decrease. The efficiency of custodians’ capital use is 5 to 15 times as high as in other projects.
DeCus has three advantages. It is completely decentralized; The collateralization rate of custodians is low, thus enhancing the capital use rate; Users and custodians both deposit bitcoins as collateral, so there is no risk of liquidation.
After users deposit the original BTC, the corresponding amount of SATS will be minted on the Ethereum Network (1 BTC = 100,000,000 SATS). SATS is the abbreviation of Satoshi and is equivalent to the satoshi unit. The value of SATS is supported by the deposited BTC, so the original BTC can be redeemed at any time, meaning that the exchange can also conveniently be done with other cross-chain BTC such as WBTC and renBTC. This is beneficial for the expansion of use cases and the implementation of liquidity mining.
In terms of functionality, the Ethereum blockchain is also far better than bitcoin, with a shorter confirmation time and lower transfer fees. Because of the recent significant decrease in the hashrate of Bitcoin network, and the difficulty of mining has not been adjusted in time, the average block generation time for bitcoin was 1,400 seconds on June 27, meaning it took 23.3 minutes to generate one block, creating the longest single-day block generation interval since the early days of bitcoin. Block generation time directly affects the arrival time of transfers. In normal circumstances, bitcoin’s block generation time is about 10 minutes, while on Ethereum the average is about 13 seconds. If the current gas price is about 10 gwei, the gas fee for an ERC20 transfer is about $1, while for a bitcoin transfer, this would normally be $4–5. Using split SATS on Ethereum is more suitable for the demands of everyday transfers and payments.
We can carry out conversions between SATS and BTC at a fixed ratio at any time. Now that El Salvador has started to recognize bitcoin as a legal currency, we predict that more and more sovereign nations will use bitcoin as the national currency, and the demand for bitcoin in payment will increase. But the price of a single product is often not worth calculating in BTC, so the demand for split bitcoin tokens with a lower value will increase. Supermarket products in El Salvador may be directly labeled with their price in SATS.
(This reprint has been authorized.)