Investors are always on the lookout for investments that have the potential to generate outsized gains. There is a multitude of asset classes that you can look to invest in that include stocks, bonds, gold, real estate and even cryptocurrency.
In case you have a low-risk appetite or are closer to retirement age it makes sense to invest in bonds that are comparatively safe. Alternatively, you can also consider high-risk asset classes such as equities and cryptocurrencies if you are willing to risk a portion of your capital for exponential returns.
When it comes to equity investing, large-cap stocks such as Apple, Amazon and Microsoft are viewed as safe havens due to their established market presence and wide economic moat. Comparatively, penny stocks are companies that are largely unproven making them volatile even in the long-term.
Cryptocurrencies, on the other hand, is a relatively new asset class that has gained popularity over the last decade. Here we look at the pros and cons of investing in penny stocks and crypto assets right now.
Should You Invest in Cryptocurrencies?
One of the most popular cryptocurrencies is Bitcoin, which is trading close to its record high in 2020 and has created massive wealth for investors.
For example, a Bitcoin was trading at $0.1 back in 2010 and you could have bought 100 Bitcoins for $10. This investment would now be worth a staggering $2.8 million. There is no other asset class that has increased investor wealth at such a record pace.
Most cryptocurrencies are built on the fundamental technology called blockchain. These digital currencies offer significant advantages over fiat currencies such as the US dollar for investors looking to preserve value.
According to a report from the Motley Fool, "Bitcoin owners don't have to worry about the actions of central banks or regulators and their potential impact on its value in comparison to other forms of money. As a result, Bitcoin has tended to perform the best when there's doubt about the ability of the traditional monetary system to handle challenging conditions."
We can see why Bitcoin and most other cryptos have surged in 2020 as the world continues to grapple with the COVID-19 pandemic.
The unemployment rates in several countries have risen higher which has led to various quantitative easing measures pressurizing global currencies. The growing uncertainties as well as a Presidential election, falling crude oil prices and lower consumer spending have all contributed to the increase in demand for cryptos and asset classes such as gold.
Further, PayPal has expanded its platform that now allows trading of top cryptocurrencies, providing a robust platform, and increasing access at the global level.
The Risks Involving Cryptocurrencies
On the other hand, while investors are bullish on the digital currency revolution, millions of others are worried about the lack of transparency in this space. While Bitcoin, Ethereum, and a host of other digital currencies have benefitted from a first-mover advantage, the barriers to entry are very low.
According to leading investors such as Warren Buffett, cryptos have no tangible value and don’t produce anything. While investing in equities, you can analyze a company’s financial statements but for cryptocurrency investors, there is no concrete evidence that provides them with information with respect to the value of the underlying asset.
Yes, there is tremendous value in blockchain technology but this can be easily replicated. Further, there are multiple regulatory issues that will delay widespread adoption all over the world.
Bitcoin and other digital currencies have increased by leaps and bounds but investors have also experienced massive drops of 90% in asset value several times over the years, making these investments extremely risky and volatile.
Penny Stocks are Also Attractive for Retail Investors
Penny stocks are another high-risk asset class for investors. These stocks trade at a very low price (generally below $5) and are attractive due to their potential to generate exponential gains and increase your wealth multi-fold.
There are plenty of penny stocks that have risen at a stellar pace increasing investor wealth multi-fold. For example, Apple stock was priced at $0.15 per share back in 1980 while Amazon stock traded at $1.73 per share in May 1997.
Alternatively, due to low price and low liquidity, penny stocks are easy to manipulate and investors can lose all their investments in case of scams, or if these companies go bankrupt.
As penny stocks are not bought by institutional investors, the public coverage for these companies is significantly lower. Most of these firms are high-risk investments given their weak financials, small size, and high volatility. Read this beginners guide to penny stocks by Tim Sykes to learn more about this type of asset.
The Verdict
We can see investing in Bitcoin and cryptocurrencies as well as in penny stocks is not for the weak-hearted. The crypto space is unregulated but penny stocks also remain vulnerable to pump and dump scams.
Crypto-enthusiasts remain bullish on the long-term opportunity in this segment. Digital currencies are considered as a safe haven similar to gold, and should gain momentum in the upcoming decade, especially if there is widespread adoption.