Why Traders Treat New Cryptocurrencies Like Penny Stocks
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There are many similarities between the cryptocurrency markets and the stock markets, one being the wide range of pricing. Just as we have penny stocks, we also have “penny cryptocurrencies”, which represent assets with the same characteristics: volatile, subject to manipulation, and often worth less than a dollar.
Assets like these are attractive to some investors, as they can provide ways to invest as little as $10 and earn returns. Let’s examine the phenomenon of penny cryptocurrencies, and if you are one of those who think they’re worth it, maybe you’ll be able to understand them better and choose more wisely.
What Are Penny Cryptocurrencies?
Simply put, a penny cryptocurrency is a cryptocurrency that has a market valuation of less than $1. There are four possible reasons why their valuations are so low:
- Tokens with a large 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 significantly affect valuations.
- Stagnant tokens: the prices of some tokens fluctuate in a tight range throughout their existence, never reaching extremely high valuations.
Pros and Cons of Penny Cryptocurrencies
Although cryptocurrencies like Bitcoin and Ethereum are very popular among investors due to their reputations and high market liquidity, a significant number of traders also pay attention to smaller cryptocurrencies. Since one of the core principles of investing is “buy low, sell high”, such currencies provide an opportunity to acquire assets at very low cost.
Pricing and 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 which start their journey in the industry fail to deliver on their promises. The dangers lurking behind the corner are illustrated by the many scams in existence, the subjective nature of price manipulation, and potentially high volatility.
Considering that penny cryptocurrencies have their downsides, a rule-based system that acts as a filter should be used constantly. The fact that we’re dealing with low valuations does not mean we are limited to small companies. XRP, Tron, Stellar, and Cardano are all priced at less than $1, but some of them, like XRP, have market caps greater than $1 billion.
In terms of new projects, focusing on those which provide innovative solutions that could be integrated into the current economy could be the best approach in the long term.
The post Why Traders Treat New Cryptocurrencies Like Penny Stocks appeared first on CryptoPotato.
