Penny Cryptos are Like Penny Stocks; That is, Risky… but Sometimes a Good Choice Anyways
Bitcoin can cost upwards of $20k, but many cryptocurrencies cost only a fraction of a dollar (or a few satoshis). These are “penny cryptos” (like penny stocks).
First off, there are a few types of penny cryptos. 1. Those that have a large supply, and thus are cheap like Ripple XRP, 2. Those that are newly minted and currently have a low price like KIN, 3. Those that once traded high but have fallen to new lows, 4. Those that never took off (perhaps because they have never been listed on an exchange). These types should not be viewed the same way, a coin that hasn’t had a chance to do anything yet should be viewed differently than one that exists but fell from past heights or never took off. Meanwhile, a solid coin with a large supply like Ripple is a bit more like a blue-chip than a penny stock despite its price-tag.
Second off, most cryptocurrencies in general are a bit like penny stocks. They are volatile, subject to manipulation, tend to be lower volume than blue-chip coins like Bitcoin (never-mind blue chip stocks like Coca-Cola), and also often literally cost pennies (although penny stock really just means “shares trading below $5”).
They are like penny stocks in that way, that is in that they are cheap for whatever reason, but they are like them in another way too. In that, you can buy 20 that look good, and while one might make you rich, the rest will likely burn you hard.
So let’s say that again, one might get you rich (and that is sort of an exciting prospect for a middle class investor who wants to take risks in crypto), but the rest will likely get you burned (that is, don’t get cocky thinking that every cheap coin is going to become Stratis; and do note that even that crashed back down after a quick spike).
To be clear, I don’t mean to imply that the odd ICO, newly minted alt, or long-stay with a historically low price isn’t a good bet, it can be if the fundamentals are there. I only mean to imply that historically there has been a lot of misses and only a handful of big hits per X coins considered. With penny stocks, the lure is that if the price goes up a buck or two, there is big bank to be made. With penny cryptos, it is the same thing.
That can be very attractive to the investor with $100 and not $20,000 for a Bitcoin. As, Bitcoin clearly already made its run from .30 cents to thousands (and logically we likely won’t see that sort of growth again).
Thing is, the blue-chips are generally a much smarter bet with stocks. Likewise, blue-chip cryptos like BTC, ETH, and LTC (generally the top 10 cryptos by market cap) are just generally much smarter bets than “penny cryptos” (if one is looking for ensured value in a single coin).
In truth, there is no real difference between $100 of XRP, $100 of BTC, and $100 of some random altcoin. It’s $100 worth of the coin in each instance. Thus, we want to look at the potential of the coin and its market.
If the forces that be decide to dump BTC, or the weather changes and everyone dumps BTC for a minute, and one is left holding the bag, they can “hodl” and be pretty confident they will see a return over time as excitement rebuilds.
Meanwhile, in a sell-off there will still be buyers to buy Bitcoin, because the volume is there.
However, if one is in a new overly hyped alt and gets left holding the bag, especially a no name penny alt, there exists a real possibility no one will ever come along to purchase that bag. This is how it is with penny stocks.
The trade-off of course is, if you pick right, that penny alt could end up going up further and faster than a top coin. So it isn’t like there is no room to play here, it is just that you want to be cautious (and consider averaging, buying dips, setting stops, etc).
People will pump penny cryptos all day long on social media and the news, they will promise you crazy returns. 9 times out of 10, this is just you being sold Ponzi oil. Remember Wolf of Wall Street, Leo’s character sold penny stocks at the start of the movie. The ultimate sort of predatory scummy investor’s first move was pushing penny stocks in that movie. That should give you an idea of what you are dealing with when you buy into a new coin or ICO. Yeah, I mean, it could be good (there are instances we could point to). But you need to be prepared to jump ship or go down with it the other 9 times.
With all that said, life is all about taking chances. I don’t see a single thing wrong with taking 1% of your investable funds and putting it on a penny crypto or penny stock. What makes me nervous is people going long in penny cryptos or stocks with big money, especially when they get all overly optimistic.
It is very easy to fall into the trap of getting this sort of confirmation bias where you start fooling yourself into thinking a bad choice was a good one and thus you keep doubling down. Nothing wrong with taking a chance and then bailing, or taking a chance and holding. However, in penny stocks and cryptos, holding can result in an investment going to literal ZERO. Thus, the $100 you gamble must be $100 you are willing to lose in total.
If you are going to go long in crypto, think about the blue-chips. If you want to gamble a bit, look for penny cryptos with fundamentals, a smart white paper, community support, and a good team.
Would I throw my savings for a month at a few penny cryptos and take a chance.
Sure, if I researched them and thought they were good coins.
Would I throw all my investable funds into penny alts? No way!
My main investment in crypto is in top alts and BTC. It will stay that way regardless of how much money Bitcoin trades for. That security then gives me room to play with a few coins further down the list and some ICOs. That would be my strategy whether I had $100 or a million…. Just like my stock portfolio isn’t filled with penny stocks either.
MORE READING: Learn more about one option for penny cryptos, ICOs. A good ICO can be a great bet, or it can be a good buy once it goes to market and gets listed on an exchange. Just remember to set stops on these things unless you know you want to hold no matter what.
TIP: “Pump and Dump groups” often “pump” penny cryptos. This can create the illusion of volume. When they pull out, you could (on a bad day) be left in a market with very few buyers and a rapidly deflating price. This is a really bad situation to be in. Thus, if you do want to try your luck at a penny crypto, make sure to examine its volume and market cap (a lack of volume on average means a lack of buyers on average, to sell a coin you must have a buyer; don’t get fooled by pumpers creating the illusion of volume, check volume over time). If its an ICO, consider its total supply and how the coins/tokens are distributed. If there are too many sellers, and not enough buyers, it can make actually getting the value out of your penny crypto tricky.
TIP: To get fiat (like USD) for your penny crypto, you’ll likely need to trade it for Bitcoin (BTC) on an exchange. Not every coin is listed on popular exchanges. This can present a real challenge for a novice crypto investor.
BOTTOMLINE: Penny cryptos can be an exciting prospect for investors without a lot of cash to invest. They can even be a smart investment. However, you really have to know what you are buying and be ready to trade them lightening quick in the event of a pump (and that means being signed up for the exchange the coin trades on before that happens). The penny crypto very often sees a pump followed by a quick dump (followed by in some worst cases months to years of stagnation). If you have guts, want to take a risk, and are set up to trade a given penny crypto, and if you know the risks and have read up on the coin, then by all means, take the risk. Just don’t get lured into penny cryptos without considering their pros and cons and without be prepared.