Are Cryptos a Good Alternative to Penny Stocks?

The global interest in cryptocurrencies, the whooping profits, and the expected rewarding future have made crypto a trending topic everywhere. Today, investors are investing millions of dollars into the crypto market and the investment scale is just getting bigger and bigger.

However, there are investors too that are concerned with the future of crypto considering the China crackdown, unpredictable prices, regulations, and similar other factors. As a new investor, if you are confused about whether to invest in the crypto market or penny stocks, then follow up this blog to have a detailed comparison of both. The comparison will try to assess which asset class can provide a better return on investment, keeping in mind the risk-to-reward ratio involved in both.

A Starter’s Guide to the Crypto-Market

Investing in the crypto market comes with its fair share of technicalities that must be understood before an investment can be made. Often while researching any cryptocurrency, the fundamentals that you will be looking at won’t probably be easily comprehensible at the start. Words like “second-layer solution”, “side-chain”, “Proof-of-stake”, and similar others will be the selling point for most coins, confusing the average retail investor.

However, it is important to develop a solid understanding of the underlying technology, as it is easy to lose money on a cryptocurrency that might have a good marketing team that promotes how they will “revolutionize finance”, but the underlying fundamentals are weak.

Taking Note of Market Capitalization

For a new retail investor coming into the cryptocurrency market, it is also important to stay in projects that have a relatively high market cap. This is because while a newcomer might gain a high reward by investing in a low market cap coin at the start, he/she can also lose all of the principal investment on a low market cap project.

This is why it’s better to earn a decent amount of profit on your principal investment on a high market-cap cryptocurrency and then use those profits to diversify into low cap coins. This approach might take some time to reward you, but it is also a safer way to make money in the cryptocurrency market. Some examples of high market cap cryptocurrencies are listed in the below figure:

Pros & Cons of Investing in the Crypto Market

Below, we have listed the pros and cons of the cryptocurrency market and how your investment can be affected positively and negatively as a result.

Pros of the Crypto Market

  • High Reward: The primary factor that draws investors towards the crypto market are the high rewards involved. To compare, Bitcoin has remained the best performing asset of the last decade when compared with other asset classes, such as stocks, gold, silver, etc. Investors have enjoyed gains ten times more than the NASDAQ 100 over the long term.
  • Security: Another core philosophy upon which the crypto market was built is security. If your funds are invested in crypto, it is very next to impossible for the technology to get hacked or for any government to seize your funds due to the encryption involved with blockchain technology.
  • Utility: Many major cryptocurrencies hold a promise of utility that can create major value for the world once it’s fully achieved. Compared that with penny stocks, the likelihood of long-term value creation is higher in crypto. Thus utility is another major factor why investors can achieve lucrative profits in the crypto market.

Cons of the Crypto Market

  • Volatility: For some, the volatility might present an opportunity. But for most who wish to invest in the cryptocurrency market, volatility has always remained a major issue. This is because it is not uncommon to make an investment in crypto and lose 50% of its value within a month, thus causing the investment to get stuck until it reaches breakeven again.
  • Altcoins follow BTC: Almost all altcoins gain or lose their value according to Bitcoin. This makes it an issue for investors putting money in altcoins, as Bitcoin has a major influence on them. Thus, all investments in crypto have to be made while considering how Bitcoin might perform in the future.
  • No Government Oversight: While zero government intervention was a core philosophy upon which the cryptocurrency market was established, it does have major drawbacks as well. Major rug pulls, pump and dumps, and other forms of market manipulation are very common in crypto. Due to the lack of government oversight, the investor has no one to turn to in case of becoming the victim of any such events.

A Starter’s Guide to Penny Stocks

Commonly in the larger stock market, any stock that has a price less than $1 is typically referred to as a “penny stock”. While some even consider $3 or $4 stocks to be penny stocks. A good way to categorize any share as a penny stock is by classifying any company with a market cap of less than $250 million.

For a new investor looking towards penny stocks, it is important to know that this is a market of its own where investors with a very specific mindset come to trade. The market is typically known to be volatile, as many companies fail that are listed in the “pink sheets”. This is why any investor looking to invest here needs to perform thorough due diligence into the company’s financials.

Pros & Cons of Investing in Penny Stocks

More can be understood by considering the pros and cons attached to penny stocks as listed below.

Pros of Penny Stocks

  • High Reward: The primary reason anyone invests in penny stocks is due to the high rewards involved. Typically, getting a 50-100% return on investment in a very short period of time is possible with penny stocks. It is very common for share prices to move to $2 from $1.
  • Low Capital Required: As the share price is small, the investor requires less capital to pick up more stocks of the company. Since with less capital, investors can get a high return on investment, penny stocks have historically attracted a lot of retail investors.

Cons of Penny Stocks

  • Risk of Default: Since the companies listed as penny stocks are usually very small, it is fairly common for many to default and shut down completely. In such a case, investors have to bear the significant financial loss.
  • Low Volume/Lack of liquidity: Because most individual penny stocks do not have a lot of buyers and sellers, the investor can possibly get trapped with shares that no one else wants to purchase in the future.
  • Market Manipulation/Frauds: Many market movers are aware of major retail activity happening in the penny stock market. This is why investors can become victims of fraud or market manipulation, as the share price can be more easily manipulated to low volume/small market cap.

Final Verdict: Crypto or Penny Stocks?

Both the crypto market and penny stocks promise a common outcome: high rewards for the right investments. However, both come with their own forms of risks/worst-case scenarios. According to our opinion, cryptos hold a fundamental advantage over penny stocks, i.e., cryptocurrencies are still building towards a final product that has not been widely adopted. In comparison, most businesses that are penny stocks are unlikely to rate highly in the value-creation department.

Investors who invest in the crypto market have a higher likelihood of getting high rewards if the project adds major value to the world. This is why large institutions are more likely to invest in cryptocurrencies in the future than penny stocks. Thus, given the risk profile for both options, the crypto market holds a more promising long-term future for investors, despite the volatile price action.