Altcoins: Penny Stocks on Cocaine
Altcoins are often seen as the more extreme Cryptocurrency equivalent of penny stocks (and low market cap stocks) in the traditional market due to a number of reasons.
Because of the low market cap, low analyst and news coverage and often not being traded on large exchanges, penny stocks usually have low liquidity. This creates an environment for sudden increases in the volatility of the share price, which is also why they are seen as risky plays and are often targeted by short-term traders trying to make a quick profit off of sudden price swings.
Traders base their trades on events like news and rumors as these often seem to have the most severe impact on the share price if the news is significant for the company. If one plays it right, extraordinary returns can be made by trading penny stocks which are more rare with stocks that have larger market caps.
While there is a lot of money to be made by those that have the right trading strategy, trading these penny stocks does not come without risks. The lack of attention and analyst coverage, low liquidity and plenty of people looking to get rich, leads to certain people influencing the share price. This can be done by spreading false rumors or organizing pump and dump schemes for example.
Liquidity in Altcoins varies a lot. Mostly the largest Altcoins (by market cap) are very liquid while the smaller and less popular ones are lacking in liquidity with a growing number of projects seeing close to 0$ in trading volume per day by now. Just as with penny stocks, large price swings in Altcoins are often the result of traders looking to capitalize on news and rumors.
Progress with regards to regulation is severely lacking in the Cryptocurrency industry with governments still trying to make sense of the industry, its possibilities, and its consequences. The lack of regulation creates uncertainty in the industry and opens it up to people who are looking to exploit this by manipulating prices. Pump and dump schemes are not even illegal for example, which is also why they are so common among the Altcoins with lower liquidity.
There are more drivers of significant price movements with Altcoins than with penny stocks. But the price movements witnessed with Altcoins also tend to be a lot more extreme than those seen with penny stocks. The reason for this is that people know that the Cryptocurrency industry is young and the potential is huge. Altcoin prices are heavily influenced by the number of users as there is no real tangible value. More users of a certain Altcoin will lead to increased demand. Depending on the success of the project and thus the number of active users, this demand can grow to huge amounts over the years. Since the price is based on usage, the fair value of an Altcoin is difficult to determine and has no real limit in theory. This is unlike stocks that are backed by real businesses and easier to value.
People do not know yet just how big the Cryptocurrency industry will become and which projects are going to be on top in the long run and actively speculate on this outcome. Especially during periods of bullish sentiment, Altcoins tend to show extreme upward movements which creates a domino effect: An increasing number of people then see the return on investment that these coins can generate and look for a way to join in on the profits. This has created a larger community that is looking to make a profit in Cryptocurrencies than in penny stocks, aiding the exceptional price movements. It has occurred on multiple occasions that investors earned a 1000x + return on their investment, just to give an idea of what type of movements occur in this market. An overview of a couple of extraordinary returns can be seen in the table below:
The overview here is of the maximum return taken from the moment of ICO. So the tokens were not traded on the exchange yet. Also, the time to achieve that maximum return on investment (ROI) sometimes took a couple of years.
However, it does not always have to take that long. Below you can find a chart of Qtum, which generated a return of 940% within a month, mostly driven by a sudden increase in bullish sentiment throughout the market.
So penny stocks and Altcoins show a lot of similarities. However, because the Cryptocurrency market is so young, there are a lot of inefficiencies to be exploited and a ton of potential growth for the coming years. Combine this with the fact that Altcoins derive their value from the activity of users, and you have an even more volatile Cryptocurrency equivalent of penny stocks.
As mentioned in the article, the price movements of Altcoins are highly dependent on overall market sentiment. After the announcement of president Xi last week, the entire market has been on a tear. We expect this bullish sentiment to continue for some time, leading to more upward price movements in Altcoins.