Why Traders Treat New Cryptocurrencies Like Penny Stocks?


There are many similarities between the cryptocurrency and the stock markets, one of them has to do with a wide range of assets based on pricing. If in one place we have penny stocks, we also have “penny cryptocurrencies”, which represent assets with the same characteristics: volatile, subject to manipulation, and often cost less than a dollar.

Assets like this are attractive to some investors as they can provide even ways to invest $10 and earn returns in the future. Let’s examine a bit the phenomenon of penny cryptocurrencies and if you are one of those that think it’s worth it, maybe you be able to understand them better and choose them wisely.

What are penny cryptocurrencies?

Simply put, a penny cryptocurrency is a cryptocurrency that has a market valuation of less than $1. There four different reasons why their valuation is so low, which is why we have four different categories:

  • Tokens with a maximum supply: since pricing is set based on supply and demand principles, cryptocurrencies with a large maximum supply are worthless.
  • Newly created tokens: companies issuing new cryptocurrencies set meager prices at the beginning to attract investors.
  • Depreciated tokens: not all projects end up well, and bear markets can drive valuations very well.
  • Stagnant tokens: some of the tokens fluctuate in a tight range throughout their existence, without reaching extremely high valuations.

Pros and cons of penny cryptocurrencies

Although cryptocurrencies like Bitcoin or Ethereum are very popular among investors due to their reputation and high market liquidity, a significant number of traders are also paying attention to smaller cryptocurrencies. Since one of the core principles of investing is “buy low sell high,” they provide an opportunity to acquire assets are a very low cost.

Pricing and a massive potential (risk versus reward) for growth are two of the most important advantages of penny cryptocurrencies since they enable even people with limited capital to get involved in the market.

However, the potential for growth does not equal success, and that’s the reason why most of the small companies who start their journey in the industry fail to deliver their promises. The dangers waiting behind the corner are represented by many scam companies, the subjective nature towards price manipulations, and potentially high volatility.

Considering that penny cryptocurrencies have their own associates’ downside, a rule-based system that acts as a filter should be used constantly. Only because we’re dealing with low valuations, it does not mean we have to deal only with small companies. Ripple, Tron, Stellar, and Cardano are all priced less than $1, but some of them, like Ripple, have market cap greater than $1 billion.

In terms of new projects emerging, focusing on those that provide innovative solutions that could be integrated into the current economy might result positively in the long-term.

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