Buying cheap small caps in the hope that prices will rise is a strategy not restricted to stock market trading. Cryptocurrency investors are doing the same — parking their money in small-cap cryptos and praying for a windfall. But experts say this could be risky.
There are over 6,000 virtual currencies and tokens circulating around the world, and spotting a multi-bagger early on is near impossible, they say.
Much like in the stock market, the world of cryptocurrencies also has large-, mid- and small-cap coins and tokens.
A ‘small-cap crypto’, or ‘penny crypto’, is a currency with a market capitalisation (Mcap) usually in the $5–15 million range, while ‘mid caps’ range between $100 million and $500 million. Cryptos bearing a market cap of more than $500 million are widely circulated and marketed–and earn the ‘large cap’ tag.
Crypto watchers may call the “buy cheap, sell dear” strategy risky, but investors have made considerable sums of money adopting it. The phenomenal price rise seen in coins and tokens, such as Solana, Polkadot, BNB, Tezos, Ripple, Cardano, Avalanche, Dogecoin, Matic and Shiba Inu stand testimony to this time-tested strategy.
“People do take positions in undervalued cryptos when they find top-line currencies expensive. The problem with this strategy is that there are several cryptos with Mcap as low as $1 million. There is a serious risk of losing money on many of these coins and tokens,” says Sachin Jain, founding partner at Amesten Capital, which runs a portfolio management service for cryptocurrency investors. “Low-value cryptos are susceptible to deep price corrections in times of a market meltdown. There’s also a risk of developers cashing out their entire holdings and exiting the market. In such cases, investors would lose their entire capital,” he said.
Crypto fund managers recommend investors buy cryptos that are built around a long-term project or products. Investors should only invest in top-rated cryptos that are widely circulated.
There are a lot of “projects” that yield cryptos or tokens as a reward for enablers (the ‘doers’ of the project). Many a time, developers may not have the means to market their project or their reward tokens. If the project is long sustaining and the developer’s narrative is robust, investors can buy their tokens at lower prices. These are called “undervalued gems” in crypto fund management parlance. This is precisely why savvy investors continue to top their investments in Solana, Polkadot and Cardano, as they believe these new-gen blockchains will disrupt the dominance of ethereum. Ripple and Tezos are seen to aid the payments industry.
“The reason why people buy small-caps is that they multiply faster than top-line cryptos. Little they realise, they crash at a much faster pace too,” says Sidharth Sogani, founder- CEO, Crebaco, that offers rating services to crypto issuers, exchanges and DeFi enablers. “Some small-cap coin issuers are scam-masters too. … Investors should do their research before investing in lesser-known coins and tokens.”
Investors move to lesser-known cryptos because they cannot afford to buy top-line coins. “People feel they should be able to buy one whole bitcoin and not a fraction of it. They’re not happy investing in a part of it. This sentiment drives investors to penny cryptos,” says Sathvik Vishwanath, CEO of Unocoin, a crypto exchange.
Crypto investors should always be careful — and more so with penny cryptos. They should be conscious of the Cryptocurrencies Bill to be tabled in Parliament soon. Any adverse decision by the government may trigger a sell-off — bleeding small caps the most.