There are many differences between cryptocurrency and penny stocks, but it’s fair to say that each market attracts its share of first-time investors. And there is a good reason for this confluence. 

For starters, anyone can invest in cryptocurrency and penny stocks using modest initial capital. What’s more, both offer the potential for short- and long-term growth, and just as there are countless penny stocks into which you can put your savings, there are thousands of cryptocurrencies that can be purchased and traded on the markets. Other parallels between cryptocurrencies and penny stocks include the accessibility of both types of assets and bygone eras when regulation and investor protections were scarce. 

On a price-per-unit basis, the vast majority of digital assets have a value similar to that of penny stocks, which trade for $5 per share or less. These low-cap digital assets are even referred to as ‘penny cryptos.’

The question is, what’s the best option for a budding new trader – stocks or crypto? And which factors do you need to be aware of when weighing up your decision? 

Trading Penny Stocks

Examples of so-called penny stocks include FCEL, ENZC, and ALPP. The former is the stock of FuelCell Energy, Inc., (FCEL) and as its monthly chart shows, trading it can be a profitable endeavor:

FCEL 30-day performance. Source: Nasdaq.

Successfully day trading penny stocks calls for an understanding of global industries (renewables, energy, metals, supply chain, pharma etc) and of the innovations that companies operating in these domains are pushing, which will, in turn, drive their stock price.

You’ve probably heard the saying “buy the rumor, sell the news.” When you’re day trading stocks, there’s a lot of truth in this. Successful trading calls for keeping in the loop about company developments and filings, regulatory actions, and broader macro trends that can feed into the demand for particular stocks.

The penny stocks of innovative new companies have a lot of room to grow. This means that when price discovery occurs, it can be dramatic, yielding double-digit percentage gains. But for every stock that makes an upward move, there will be another 10 that falter or move in the opposite direction. This invokes another trading truism: that you should cut your losers and let your winners run.

Even if you have become attached to a particular company and bought into its vision if its stock isn’t delivering, don’t hesitate to cut it from your portfolio; that capital could be better put to use on buying the next 10x penny stock.

Provided an investment strategy is adopted that considers the risk profile of these assets and which focuses on strong fundamentals, penny stocks can be a highly profitable component of a growth portfolio.

What Are Crypto’s Penny Stocks?

Because bitcoin is the reference currency for the crypto market, assets paired against it are priced in satoshis, or ‘sats’ – units of 1 BTC, each of which is divisible into 100 million sats. The less sats a cryptocurrency is priced at, the cheaper it is to buy. A good example of a ‘penny stock’ crypto is Dogecoin (DOGE-X). 

Dogecoin’s performance against BTC for the past 12 months. When DOGE spikes in price, other altcoins tend to follow. In mid-November, DOGE began its second breakout of the year versus BTC. Source: CoinCodex.

Low cap cryptos are cryptocurrencies with a low total market capitalization derived by the price per coin multiplied by the total circulating supply. When these coins break out of the range they have been trading in, it’s common to see gains of 2x or greater in a short space of time. Profiting from these opportunities calls for understanding market cycles, in order to time your entry. It also demands a dynamic strategy: these coins are not for long-term holding – or ‘hodling’ – but should be traded out of to lock in profit.

Examples of other crypto ‘penny stocks’ that often perform well when altcoins are surging include XPR, TRX, and NEO.

Which Low Investment Option Should You Take?

For all the similarities between low cap cryptos and penny stocks, each market has its own peculiarities. For example, stocks are priced in USD, and thus the performance of your portfolio can be easily measured by its dollar growth. Cryptocurrencies, on the other hand, are priced in both USD and BTC. When bitcoin is exhibiting strength versus altcoins, it is possible to make a USD profit in crypto ‘penny stocks’ but to be down in BTC. This is undesirable, as it would have been more profitable to simply hold BTC. Thus, understanding bitcoin’s dominance versus altcoins is your key to seeing where the money is moving.

Each market also carries its own risks. With stocks, for example, you are dependent upon the actions of humans; a CEO being indicted or the SEC launching a fraud investigation would be sure to put a dent in those companies’ stocks. With crypto, the human element is reduced, but the technical risks are heightened, such as the potential for a smart contract bug or for losing funds through a phishing attack.

As such, you should learn the fundamentals of each market before actively trading it with any significant size. Master the basics before you go all in. If your background is in traditional finance, and you are comfortable with both fundamental and technical analysis (FA and TA), you may fare better with penny stocks. If you’re a tech-savvy digital native, on the other hand, you may find the world of cryptocurrencies more to your taste.

If trading penny stocks and low cap cryptos was easy money, everyone would be doing it. Thankfully, there are plenty of free resources available to beginners interested in learning the ropes and then leveling up. Put in the work and you’ll instantly be ahead of 90% of other casual investors. Take your time, study the chart of coins and stocks that capture your attention, and only venture in when you’re ready.