In many ways trading altcoins is similar to investing in penny stocks, and that comparison has been made many times in the past by other authors. But in other ways it is very different.
In case you don’t know, penny stocks are the shares of smaller businesses and early stage companies, which have a much lower value than regular stocks. They are also much more volatile, often experiencing gains of more than 100% in a single day – or disappearing altogether overnight.
There are some important lessons that can be taken from penny stock trading and applied to altcoins:
- Don’t put all of your eggs in one basket: The first thing you will learn about penny stocks is that you should spread your capital out among as many different shares as possible, to reduce the chances that you will lose everything. The majority of new business will fail in their first few years, meaning that their shares will drop in value to zero. The same is true for altcoins – many new coins will completely fail within the first year of trading. It’s also true that, although there is a lot you can do to make sure you pick the winners, there are also so many unknowns that there is no such thing as a certainty. It is often tempting to go ‘all in’ on an exciting opportunity you believe could make 1000% returns, but this can easily end your career as an altcoin trader before it has even begun
- Don’t believe the hype (or the FUD): The smaller a market is, the easier it is to manipulate. Penny stocks have always been subject to a large amount of professional hype, and this is certainly true for cryptocurrency as well. Professional promoters will hype up a coin, through newsletters and tip services, through social media and blogs and even through advertising. They may be paid by the coin’s developers who wish to increase the value of their holdings, or they may wish to increase the value of their own holdings. In either case, the kind of artificial price pump driven by this kind of hype is often followed by a price crash as the people behind it cash out at the higher price. This is sometimes called a ‘Pump and Dump’ or just ‘P&D’. In a similar way, FUD can be deliberately spread in order to artificially drive down the price so that the people behind it can pick up cheap coins. It is always true in life, but doubly true when researching altcoins for trading, that you should always be skeptical of what you read, do your own research, and make up your own mind.
- Be Quick to Take Losses, Slow to Take Profits: One of the biggest mistakes that penny stock traders make is to take profits on winners too soon, but keep hold of the losers until they are worthless. I have seen this a lot in cryptocurrency trading as well. In both of these niches it is common for the majority of your picks to lose money. When a trader sees profits of 50%, 100% or even higher in a relatively short space of time it is very easy for emotions to kick in and overtake any reasoned assessment. This may feel like a great profit, you may fear losing it and want to lock in the profit, or you may just get excited and impatient to realize your gains even though the price is still trending upwards. But because in both penny stocks and altcoins you are likely to pick a lot of losers, you need to get very high profits on the winners to come out with a good profit overall – so even a 100% profit on a winning pick may not be as great as it might seem. At the same time, many traders become emotionally invested in what they buy, and find it hard to give up hope and sell even when it is clear that the price is going down, and in this way they end up losing most or all of the value of their investment when they could have cut their losses much earlier if they had taken a more rational approach.
One key difference between penny stocks and alternative digital currency is that the former may take years to realize a profit, whereas the cryptocurrency world is very fast paced indeed. Retail penny stock traders may be able to pick out companies with potential and then only check back on them every few months – in fact from one month to the next there may be little or no new information to use for re-evaluating your position. In cryptocurrency this would not be a good idea at all. You should only get involved in a market like this is if you are ready and willing to spend a lot of time at your computer, regularly checking on price movements and the latest news, and changing your positions accordingly.