You’ve likely heard of Bitcoin, and perhaps even Litecoin or Ethereum. These are all forms of cryptocurrency that gained attention for their astoundingly quick growth in value.
But have you ever heard of penny cryptocurrency? Penny cryptocurrencies are a type of cryptocurrency worth $1 or less, kind of like penny stocks. You might be wondering whether you should invest in penny cryptocurrency, as it’s gained some popularity in recent years.
Is it a wise investment? The short answer is that it all depends on your specific financial situation, as well as your tolerance for risk.
Below, you’ll find everything you need to know about investing in penny cryptocurrency, from the types of investments out there to various ways you can protect yourself.
What Is Penny Cryptocurrency?
Much like penny stocks, penny cryptocurrencies are cryptos with a market value of $1 or less. They’re very affordable (as low as a few cents), but also very volatile. There is a very small chance of growing your money exponentially with cryptocurrency, but there’s also a very high chance you’ll lose all of your money. In addition, the penny crypto world is full of scams, meaning you always need to be on the lookout for sketchy behavior.
You might be wondering who would ever invest in it. Typically, those who are financially stable enough that they can risk losing 100% of their investment choose to invest in penny cryptocurrencies.
Retired investment advisor Charles Padua puts it this way: “It is hard to imagine cryptocurrency being a suitable investment for all but those who are sufficiently wealthy that they can burn wads of cash off a bridge and not be distressed by it.”
Types of Penny Cryptocurrency
There are four primary types of penny cryptocurrency (also referred to as penny coins) according to Yahoo! Finance:
Plentiful cryptos: This refers to cryptos that are in large supply. Plentiful cryptos could be a good investment, as the large supply helps keep prices down. Ripple (XRP), which you might have heard of, was a plentiful crypto that increased drastically in value.
Newly minted cryptos: These are new cryptocurrencies that people might not know about yet. Sometimes, they’re simply referred to as new cryptos. The key here is researching various new cryptos to find coins that seem promising.
Fallen cryptos: These are cryptocurrencies that used to be worth a lot but no longer are. They’re also referred to as crashing cryptos. Although it’s possible for a fallen crypto to see growth again, you’ll likely want to avoid investing in fallen cryptos, as new growth is unlikely.
Stagnant cryptos: Stagnant cryptocurrencies are ones that have been around for a while without seeing any price changes. Because they haven’t seen much growth yet, they’re unlikely to grow in the future.
Should I Invest in Penny Cryptocurrency?
Although penny cryptocurrencies are volatile and unpredictable, there’s a small chance that you’ll find a diamond in the rough that becomes quite lucrative. Stellar Lumens (XLM) and Ripple (XRP) are two examples of penny cryptocurrencies with values that grew exponentially.
Plus, some people invest in cryptocurrency because they enjoy the thrill that accompanies a market that never closes.
If you’re considering investing in penny cryptocurrency, you should be able to answer “yes” to the following statements:
- I am willing to lose 100% of my money.
- I have sufficient savings in my emergency fund and rainy day fund.
- I have no high-interest debt.
- I am on track with my retirement planning.
- I am highly risk-tolerant and can stomach volatility in my investments’ value.
If you cannot answer “yes” to the following statements, you likely should not consider penny cryptocurrency. But if you can, it might be worth pursuing.
If you do decide to invest in penny cryptocurrency, financial experts recommend that you keep your total share of investments that have idiosyncratic risk — i.e. risk that is specific to a particular investment, like the risks that affect a single stock, employee options (particularly in a private company), and crypto — within 5-10% of your total taxable investment portfolio.
Here an example of this in action: Let’s say you have $100,000 in taxable investments. With the above ratio, you can put between $5,000 to $10,000 total in crypto. If you already have $5,000 invested in your company’s private stock, then you can put no more than $5,000 in crypto, given that you already have 5% in risky investments.
The Importance of Staying Protected
Unfortunately, the penny crypto world is rife with scams. In addition, penny cryptocurrency values can plummet drastically, meaning you can lose your investment quite quickly. Although there’s no way to fully protect against these two risks, there are ways you can ensure you’re as protected as possible as an investor.
Do Your Own Research
Unfortunately, fraud is prevalent in the crypto world. In fact, cryptocurrency founders robbed users of $195 million in just the first quarter of 2019 alone. You can combat this by researching the cryptos you’re looking at before investing. Take a look at the team who created the crypto (as well as the advisors and investors) and read the whitepaper.
Understand How the Technology Actually Works
It’s important to know what exactly you’re investing in. Make sure you understand the benefits and weaknesses of the underlying technology. You don’t have to be a technology whiz, but having a general, surface-level understanding of the crypto is important.
Make Sure the Crypto Is Viable
It’s important to ensure the technology in question actually exists. Many coins are based on hypothetical concepts that aren’t ultimately viable, but speculators will invest in them and then the founders will walk away with millions of dollars.
The Best Penny Cryptocurrencies Right Now
Looking to invest in the penny cryptocurrency market? Here are some top penny cryptocurrencies to consider for newbies to the crypto market.
This cryptocurrency has been around since 2012 and is a payment system that uses blockchain technology. Ripple works with banks and other financial institutions. XRP is the third largest digital asset in the world (behind Bitcoin and Ethereum) according to CoinMarketCap.
Current price: $0.45
Also referred to by the name Stellar Lumens, this cryptocurrency helps organizations convert digital currency to fiat currency. It’s the ninth largest digital asset in the world.
Current price: $0.14
Founded by Justin Sun, who recently acquired BitTorrent, Tron is a fairly popular penny cryptocurrency right now, in large part due to Sun being the founder. Tron, which was founded in 2017, is similar to Ethereum, as it’s an operating system that uses blockchain technology. It was formerly an ERC20 token, and it’s the 11th largest crypto.
Current price: $0.03
Created by the former co-founder of Ethereum, Cardano is an open-source, decentralized public blockchain that was created in 2015. Cardano is the 10th largest crypto.
Current price: $0.09
This open-source distributed ledger combines blockchain with the Internet of Things. Ranked as the 13th largest digital asset in the world, IOTA is managed by the IOTA Foundation, a German nonprofit founded in 2017 that supports protocols for the connected world. IOTA is ranked 15th in largest cryptos.
Current price: $0.49
This public blockchain is used in industries like logistics, health care, and automobiles. VeChain has offices in Shanghai, Singapore, Paris, Luxembourg, Palo Alto, Tokyo, and Hong Kong. VeChain is ranked 26th in the crypto market.
Current price: $0.01
Is the Risk of Penny Cryptocurrency Worth the Reward?
When it comes to investing in penny cryptos, the most important thing to consider is risk. If you don’t have ample savings, you’re in significant debt, or you’re behind on your retirement savings goals, then it’s likely something you should hold off on for the time being. But if you’re an investor seeking high potential rewards and you’re not afraid of what could be a lot of risk, cryptos could be worth pursuing. Just make sure you only allot 5-10% or less of your portfolio for this unpredictable, risky investment, and be very comfortable with the possibility that you could lose all of your money.
For many investors, sticking with the basics when it comes to investing might be more productive in the long run. Read this article on how to start investing confidently to see how much of these investing principles you’ve put in place. If you find that you’ve got a solid financial foundation in terms of savings and knowledge, then cryptocurrencies might be a suitable next investment for you to consider.