In my last post, we looked at the top five small cap cryptocurrencies under 100 million but over 50 million. This report included a cryptocurrency that is rarely looked at called ZCoin. We covered on whether the coin is mineable, cashable, and advantageous.
What are the disadvantages of investing in a coin which does not have market capitalization to back it up? What I mean by this is that market capitalization shows the public that the investment is worthy of being invested in. When investing, a lot of people forget to look at market capitalization as a control method to prevent investing in garbage.
Investing in small-cap investments, like ZCoin, is an issue that needs to be addressed. Getting excited about small caps can lead investors into some murky water and into a “penny stock” type of atmosphere. You might ask, "Why is ZCoin in a penny stock type of atmosphere?"
Let's put it this way, currencies like the US dollar and the EURO are measured in trillions of dollars. Cryptocurrencies like Bitcoin are measured in billions of dollars. ZCoin and other small cap Investments are under $100 market capitalization. The issue of under capitalization could cause several issues.
One of these issues is the ability of someone or some institution having the ability to manipulate the investment. There are all kinds of stories about penny stocks being manipulated by people, large institutions, and companies. They do this because they believe that they can manipulate the price and force other people, through publications or some other means, to buy afterwards. They then sell and pocket all of the gains. You do not want to be a pump-and-dump victim.
Realistically, the pump-and-dump scam does not happen all the time. The idea of some person or company planning on making money from pumping up a company and sending it to hell is rather dumb. If you truly know the company or currency that you're investing in you should not be worried. If you are diversified in many investments you should not be worried aswell.
But why are we so interested such small investments? From what I can gather I know that the interest is derived from the following points:
- The “penny” investment is hyped by their owners or operators to get you to buy.
- The company that runs the investment will communicate that they are better than the larger competition.
- There is a shopping market attitude (buy low sell high).
Point one and two of the above points is obvious to understand. The owners of the company want your money in the investment so that the investment can reach new heights. They will use marketing techniques and do everything they can to make you buy. Not only do they want you to buy but they want you to sell something so that you can buy. In essence, your money devalues one investment and increases the value of another investment.
What about part three? Why is there a shopping market attitude? What is a shopping market attitude? You should not have a shopping market attitude when handling investments because the shopping market IS NOT the investment market.
The Food Market is NOT the Crypto Market
In our mind when we hear of the stock market some of us associate the market with the supermarket or the grocery store. Investment advisors and pundits will give us strategies on T.V. that are similar to how we shop at the grocery store. Rarely does someone set out to buy the most expensive items. For the most part all of us try to find the most inexpensive solution to our food and daily needs.
This strategy of finding the most inexpensive solution is the same as our investment strategy. Unfortunately, this investment strategy can cause a lot of pain since we will take what we learned from the supermarket and try to replicate the strategy in our brokerage account. When we look at how expensive coffee is we will try to find a substitute so that we can save money. The concept of undervaluation is the concept that can be derived from this understanding.
So when we look for undervalued investments we are doing the same thing we do at the supermarket. We are trying to find a substitute at the same price. Instead of buying the company that has the strength to keep going up we try to buy a cheaper substitute that goes nowhere. We should keep this in mind because, like in my previous posts and posts to come, we should buy on strength and not on weakness. Buying on strength with the expectation of more strength with a clear sell strategy is something that will make you more money than buying on weakness.
Clear Your Mind
I know that a lot of you loved the previous post on the top five cryptocurrencies. But you have to clear your mind of the shopping market attitude. Buying weak cryptocurrencies that cannot prove themselves and get a larger market capitalization could end up losing you money. You do not want to do that.
As shown in the graph below, Bitcoin has not gone anywhere for the last week. Bitcoin, which represents about 33% of the total market capitalization, is testing its $6,000 support line for the fifth time this year. This is significant because the $6,000 support line is becoming a strong support line that is being relied upon by traders.
Some Bitcoin traders are entering in at around the $6,000 support line because they believe that the support line will hold and that the Bitcoin can only increase from here. This is a bad strategy because the strategy is similar to the shopping market attitude as explained above. This strategy is a buy when undervalued and hope that the market will value the cryptocurrency higher.
The buying in hopes for an increase afterwards strategy could lead to disaster if the $6,000 support line is broken through. As mentioned in previous posts, “The stronger the support line the harder the support line falls” is something that you should be concerned about. If the market breaches the $6,000 support you can expect a swift drop to $5,000 and even lower.
However, Bitcoin and other “Big 5” cryptocurrency traders are ready for a rally when the rally comes. Litecoin, Stellar, and Ripple traders want Bitcoin to rally to new heights. They want the rally because they know that their holdings are related to how Bitcoin performs. They know that if Bitcoin does well then, their cryptocurrencies will do better. The risk factor on these coins should send the rate of return to heights greater than Bitcoin.
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