Bitcoins, Satoshis and Bits (Oh My)

Bitcoin Currency Symbols 3Bitcoins seem to be everywhere in the news today, including alternative, international, and mainstream news. The value of bitcoin is also experiencing “higher lows” now than in 2013. In fact, we are seeing lows that are nearly 400% higher. According to Tim Draper, a Silicon Valley venture capitalist who recently purchased 30,000 bitcoins at an auction held by the US Marshall Office following their seizure from the shuttered Silk Road website, he expects bitcoins to reach well over $10,000 per bitcoin in three years or less!

Although we are seeing a bit of a retreat in price at the moment, I am not alone in believing that bitcoin’s long-term outlook is fantastic. What we are looking at, however, is something that the original developers expected to happen. That is, that the unit of “bitcoin” would be too valuable for everyday commerce and would have to be replaced with something smaller.

How to Write in Bitcoin

In my book, “The Bitcoin Tutor: Unlocking the Secrets of Bitcoin”, I discuss this topic in the section, “How to Write in Bitcoin”. The basic idea is that there needs to be a smaller unit than bitcoin. I discussed two popular notions in the book, called milli-bitcoins and micro-bitcoins. Let’s look at a little math to review both of these ideas:

1 Bitcoin = 1,000 Milli-Bitcoins = 1,000,000 Micro-Bitcoins

That is, 1 bitcoin equals one thousand milli-bitcoins, which also equals one million micro-bitcoins. A fascinating part of this proposal is that bitcoins were effectively designed with this in mind, as bitcoins already have eight decimal places rather than dollars and cents which only have two. Note that most currencies use the two decimal place concept, as is the case with dollars and cents, euros and cents, and pounds and pence. We are all used to seeing prices written as $1.25 or €1.25 or £1.25, for dollars, euros, and pounds.

So, how do we achieve this with bitcoin? Let’s start by looking at the formula above, this time adding the available number of decimal points:

1.00000000 Bitcoin = 1,000.00000 Milli-Bitcoins = 1,000,000.00 Micro-Bitcoins

As you will see, micro-bitcoins already include the exact number of decimal points that dollars and cents already use, that is, two decimal places. You may notice that all values include the eight zeros, but have a shifted decimal point. It’s like talking about buying things in pennies versus buying things in dollars. So, $1.25 would be 125 cents, or pennies. It’s still the same amount, the same value.

What Are Satoshis?

Another concept to understand about bitcoin is that of “satoshis”. Instead of cents or pence, bitcoin uses satoshis to represent the smallest amount of a bitcoin. Rather than one-hundredth of a dollar or euro or pound, satoshis represent a much smaller piece. Satoshis are valued at one-hundred millionth of a bitcoin, that is, 0.00000001 bitcoin. This is the smallest value that can be represented with eight decimal places.

This concept is very important when it comes to micro-bitcoins, as there are 100 satoshis in one micro-bitcoin. Isn’t that convenient? Just like dollars, euros, and pounds, there are 100 subunits in each currency unit. This is just the thing we need to increase adoption and help people truly understand how to work with bitcoins.

Let’s Skip Milli-Bitcoins

Many leaders in the bitcoin community originally considered that as the price of bitcoin rose, that milli-bitcoins would be introduced, and then some years later, micro-bitcoins would become the preferred unit. Pragmatists in the community are realizing that this is not ideal for mass adoption. Many, myself included, believe that only one redenomination should occur, and due to the fast-increasing price of bitcoin and the useful 100 to 1 relationship, that micro-bitcoins should become the new unit of measure for bitcoins.

Note that changing the unit of trade doesn’t change the overall value of bitcoins. We are simply subdividing the bitcoins into smaller pieces to make them easier to work with, and to eliminate lots of decimal places that will confuse people when trying to buy or sell things in bitcoins.

Let’s Look at an Example

Let me demonstrate with an example. Assuming bitcoins are trading for $500 per bitcoin, let’s look at the formula as applied to something that you may buy on an everyday basis. Let’s use a coffee example, where you may spend $4.50 on a cappuccino or latte drink:

Coffee = $4.50 = 0.009 Bitcoin = 9 Milli-Bitcoins = 9,000 Micro-Bitcoins

Written with all decimal points, this formula could also be written as:

Coffee = $4.50  = 0.00900000 Bitcoin = 9.00000 Milli-Bitcoins = 9,000.00 Micro-Bitcoins

You can see from the milli-bitcoin advocate’s point-of-view that nine milli-bitcoins sounds pretty simple, and therefore many prefer it to 9,000 milli-bitcoins. However, let’s look at the problem that is right around the corner as the value of bitcoin increases. With bitcoin at some point in the future valued at over $10,000 per bitcoin, let’s try to buy this same $4.50 coffee. To emphasize my point, I will assume that bitcoin is valued just a bit more at $10,123.45 per bitcoin:

Coffee = $4.50  = 0.00044451 Bitcoin = 0.44451 Milli-Bitcoins = 444.51 Micro-Bitcoins

You will see that the bitcoin and milli-bitcoin amounts are quite confusing, primarily due to the number of decimal places required for proper precision. As micro-bitcoins have only two decimal places, learning to pay 444.51 micro-bitcoins will likely be a simpler transition for most people from dollars, euros, or pounds to bitcoins, especially as the value of bitcoins increase. And, only one change in denomination will be required if micro-bitcoins become the preferred unit of trade.

So, What’s a Bit?

In the 1800’s, there was a common phrase used in the United States. It even had a jingle. The phrase was, “shave and a haircut, two bits”. So, how much was “two bits” in this example? According to Wikipedia, “two bits” was used to refer to a quarter (of a dollar), or 25 cents. So, what does this have to do with bitcoin?

There is a movement to reintroduce the term “bits” in the US and worldwide in relation to bitcoin. Rather than using the term micro-bitcoins, the unit of bitcoins that allows only two decimal places, bitcoin advocates are proposing changing the term from micro-bitcoins to simply “bits”. Although the term bit was previously used for 12.5¢, it has not been in use for a century. Its use as a unit of storage in computers, as in eight bits in a byte, is also likely not to confuse people. It should be quite simple to realize whether you are measuring computer storage or counting money!

Let’s look at the formula one more time with the new term:

1.00000000 Bitcoin = 1,000,000.00 Bits

As you see, I’ve removed the milli-bitcoins unit as it is unlikely that this denomination will make any headway given the benefits of jumping directly to “bits”.

Who Supports Bits?

The largest bitcoin company to support bits publicly is BitPay (bitpay.com), one of the top bitcoin payment processors worldwide. Earlier this year, BitPay changed the primary unit it uses in its merchant system, the system that helps merchants easily accept bitcoins as payments, to display prices in micro-bitcoins, written simply as “bits”.

This is believed to help customers and merchants view prices, as converted from dollars to bitcoins, in an easier way with fewer decimal places. Let’s look at another example, for a customer looking to purchase an item costing $51.25, and the equivalent amount that would need to be paid in bitcoins and bits. Let’s assume a $500 bitcoin price again:

Item Purchased = $51.25 = 0.1025 Bitcoins = 102,500.00 Bits

Although the number of bits is much higher, only two decimal points are needed. And, as the price of bitcoins goes up, the number of bits required to buy the same item will go down. At $10,000 per bitcoin, this same item is:

Item Purchased = $51.25 = 0.005125 Bitcoins = 5,125.00 Bits

Hopefully the mathematical examples help to illuminate this point, and not confuse it!

Move Over Bitcoin

In summary, expect to see “bits” used more and more, and prices measured in bitcoins used less and less. A new currency symbol, similar to $, €, or £, has been proposed for bits. It’s a lower case letter “b” with a horizontal hash mark through the upper stem (see image above). The capital “B” symbol, with either a double vertical line or single horizontal hash mark, will still be used for bitcoin. Note that as these symbols are not yet standardized, expect variations of these to be used as an alternative to writing out the word bitcoins or bits!