Penny Crypto Coins: Watch Out for These Red Flags Before Trading

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After three years in a bear market, small-scale crypto coins are starting to look hot again. Several big-ticket coins made their moves, and the likes of Cardano (ADA) easily grew 10 times in the matter of weeks. The pattern of peaking Bitcoin (BTC) prices, followed by Ethereum (ETH) reawakening is bringing back the usual expectation for an overall altcoin season. 

Small altcoins could start rising for various reasons. One, in markets against BTC the dollar-denominated price may improve. The ETH ecosystem and rising prices may also boost some of the tokens in ETH pairings. Additionally, stablecoins like USDT may flow to smaller markets on centralized exchanges. The mainstream interest in crypto investments may also focus on cheap entry points, and a price below 5 cents can make for a small position to test the market.

Is It Altcoin Season: Can Penny Altcoins Go to the Moon?

Recently, Ivan on Tech, one of the top crypto influencers, opened a thread on the potential of penny-priced altcoins to make big moves. 

ALTSZN BACK IN A BIIIIIG WAAAYYY

— Ivan on Tech (@IvanOnTech) February 5, 2021

One of the landmarks that started sending smaller assets on a parabolic trajectory was the spike in Dogecoin (DOGE) prices. The meme-based coin, which traditionally traded around $0.002 outside the hype cycles, spiked as high as $0.08, eclipsing its 2017 peak. 

For altcoins, there are times when it seems “everything is going to the moon.” During those times, investors new and old try to make the best of the bullish season. Altcoins with a price of a few cents are hot right now, mostly for the possibility of a quick 10X growth. 

The list of coins with a price between $0.001 and $0.05 is long, and holds varied levels of risk. 

One promising group of coins contains older projects like TRON (TRX), $0.03, which has not yet pumped near its previous highs. Other coins hovering near lows include VeChain (VET), Ravencoin (RVN) at $0.02 and Verge (XVG) at $0.01. What these coins have in common is they have reached at least 10 times the valuation during the altcoin bull market in 2017. And with assets heating up again in 2021, hopes run high for a repeat performance.

Red Flags for Small-Cap Altcoins

Despite the social media enthusiasm stirred by Ivan on Tech, for some coins, the biggest hope would be a short-term pump. Most altcoins face the problem of very low volumes and, respectively, high slippage. In fact, there are only nine small-cap crypto coins as of February 2021 with more than $100M in trading. Given the unreliable data on real exchange activity, even reported volume may be misleading. 

The tickers with relatively higher volumes include TRX, VET, ReserveRights (RSR), IOST, MaticNetwork (MATIC), Mainframe (MFT), ANKR and Just (JST). The volume metric may change, but it also shows that some small-cap altcoins are inactive, with the potential to restart their climb. 

In 2021, access to altcoin and token trading is quite different from the 2017 set of exchanges. Most notably, US-based and some Canadian traders lost their access to Binance, one of the most active exchanges. Poloniex, previously a hub for multiple coins, delisted most of its assets due to conflicts with US security law. Additionally, smaller exchanges like Cryptopia closed doors. 

The new rise in altcoin trading will have new sources of liquidity and hype. Binance remains a hub for multiple altcoins, which harness the interest of Asian traders. The other factor for some low-priced altcoins is Uniswap, where assets try to establish pairs for automated algorithmic market-making. This type of market is open to all investors, with no limitations on country of origin. However, those markets can be volatile and cause rapid appreciation followed by a crash. 

Tokens Switch to Decentralized Exchanges, Yield Farming

Some low-cost tokens are also refashioning themselves as decentralized finance assets, participating in yield farming vaults. It’s important to check if their liquidity is sufficient, and whether there are opportunities for aggressive arbitrage that can sway the market price. 

One straightforward indicator for altcoin trading is to watch the Coinmarketcap liquidity metric. The metric is a combined score ranging from zero to 1,000 points, reflecting how well the market can absorb large orders. A low score means the asset is risky and order books can quickly deplete liquidity when trying to sell. For low-cost assets that usually trade in low volumes, this can happen suddenly.

The other factor in altcoin price spikes is hype, combined with the activity of pump groups. Overly aggressive promotion of tickers by crypto influencers may serve as a prompt to try out a low-priced asset, but also a sign that the hype has reached the peak. 

While low-priced assets can give significant gains, it is also important to check assets for technical soundness. If the assets will be kept on an exchange wallet, make sure the market operator has a good reputation. Many investors have lost coins after a hacked exchange closed and disabled all withdrawals. A reliable exchange is also necessary to avoid trading freezes or failed orders making it impossible to realize profits.

Other technicalities include the availability of a sound wallet with uninterrupted transaction capabilities. Smaller coins have encountered network problems, including attacks. XVG has been at risk of double-spending, and even DOGE can be attacked with only a few specialized mining rigs.

Coins like IOTA have frozen transactions for months in the past, and Electroneum (ETN), a thinly traded coin, went on for weeks with extremely slow block production. Small-cap altcoins are sometimes suitable for highly risky investments, but the best approach when trying to catch the hype is to only invest a sum you are comfortable with losing.

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