A common trap in the crypto world is succumbing to Unit Bias.
Learn what it is and how to dodge by diving into this quick guide.
Let's get learning š
1/ What is Unit Bias?
Unit bias is a psychological phenomenon influencing decision-making in cryptocurrency investing. It's the tendency of investors to prefer lower-priced assets per unit, regardless of true value or potential.
2/ A common misconception is that cheaper tokens are a better investment. For example, some investors may think that buying 10,000 tokens priced at $0.01 is better than buying one token priced at $100. But this isn't always the case.
To truly understand the potential of an investment, we must consider its market capitalization.
3/ Market Cap is the total value of all tokens in circulation. It's calculated by multiplying the token's current price by the total number of tokens in circulation.
This metric helps us understand the true size and value of a cryptocurrency, providing a better basis for comparison than simply looking at the price per token.
It can also be important to consider fully diluted valuation (FDV), calculated as price multiplied by total supply.
If the FDV is notably higher than the market cap, the value may decrease as tokens enter circulation. Keep this in mind while evaluating crypto investments.
4/ How does Unit Bias affect the crypto market?
For one, it can lead to the popularity of lower-priced tokens, as investors are attracted to the idea of owning a large number of tokens.
This might cause an overvaluation of lower-priced cryptocurrencies and an undervaluation of higher-priced ones.
5/ Unit Bias can also create unrealistic expectations for growth. When a token's price is low, investors may assume it has more room for growth than a higher-priced token.
While this can sometimes be true, it's essential to look at the bigger picture, like the project's fundamentals and market cap, before making any assumptions.
An example of this is LUNC.
People see the low price and think:
'WOW! If I buy 1M and it goes to $1 I'll be rich' But this won't happen because the market cap is 722M and would need to reach 5.9 Trillion.
That's 4.4X $BTC's highest market cap. This is pretty much impossible.
6/ To avoid falling victim to Unit Bias, consider these points:
ā¢ Pay attention to market cap rather than price per token.
ā¢ Research the project's fundamentals and long-term potential.
ā¢ Avoid hype of people selling unrealistic gains.
Remember that price alone should not be the primary factor when investing in cryptocurrencies.
7/ In summary, Unit Bias can greatly affect our choices when investing in crypto. Grasping this concept and prioritizing market cap and fundamentals enables us to make well-informed decisions and possibly enhance our returns.
Stay vigilant against Unit Bias and always conduct thorough research!
8/ If you don't know how to find out the market cap of a project or other useful information, check this thread on useful tools I made.
twitter.com/Altcoin_Gold/status/1631006817529782272?s=20
9/ For more information on what to look for when researching a project, check this guide for framework.
twitter.com/Altcoin_Gold/status/1626552142566940673?s=20