Why Traders Treat New Cryptocurrencies Like Penny Stocks?

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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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