Why Social Trading is Leading to a Crypto Penny Stock Craze

(Image: CoinGecko)

Another recent high-profile coin pump saw Shiba Inu climb drastically out of a six-month slumber to gain so much attention that the coin achieved a listing on reputable exchange Binance before buyers largely deserted the coin, leaving Shiba to fall 58% from its all-time high in the space of three days.

With more meme-based coins entering the market at a rapid rate and capturing the imagination of cryptocurrency investors looking to get rich from rapidly appreciating assets, the market appears to draw comparisons to the penny stock craze that’s currently sweeping Wall Street. But how is the rise of micro-cap coins impacting the world of crypto? And are investors aware of the risks associated with buying into such volatility?

The Rise of Crypto Gambling?

Is investing in micro-cap coins a gamble? Well, it’s fair to say that any cryptocurrency investment is a gamble considering the relatively delicate and volatile nature of the market. However, micro-investing carries a few distinctions that separate it from a straight-out gamble.

Notably, investing tends to offer much longer timeframes than gambling. When you place a bet on a roulette wheel, you’ll know the outcome in a few moments. Furthermore, your stake in the bet is final once the wheel starts spinning – meaning you can’t change your bet or decisions.

There should also be no external factors involved in a spin of a roulette wheel that impact the outcome over time.

When it comes to investing, these factors are a little different. Firstly, the bets you place on micro-cap coins could take a matter of months – even years – to play out. As we saw in the case of Shiba Inu, it took six months for the coin to appreciate. There’s also a continuous flow of information that investors are capable of accessing before they make their decisions.

However, it’s important to note that while some micro-cap coins have valid purposes – particularly as the world of NTFs is starting to see new projects arrive and offer opportunities for investors, some coins purely exist on a meme basis to pump and dump. The less-than-transparent world of crypto also opens the door to rug pulls from developers who hold a significant stake in the coins they create.

In the case of SafeMoon, another token that’s driven by social media sentiment, anti-scam crypto communities have warned about the coin’s owner holding over 50% of the liquidity of the coin – making it especially vulnerable to ‘rug pulls’ where the owner withdraws their stake, collapsing the value of the coin. Although it’s worth noting that SafeMoon has since undergone an independent audit.

Maxim Manturov, Head of Investment Research at Freedom Finance Europe, highlights that meme stocks in traditional finance are also prevalent and that it’s vital for investors to always research their investments: “An own research is always a top priority; however, everything what happened to these meme stocks is nothing but speculation. The more information one can get, the deeper understanding one will have.”