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The rise of micro-cap coins: Why social trading is leading to a crypto penny stock craze

(Image credit: Image Credit: Make-Someones-Day / Pixabay)

SafeMoon, Shiba Inu, Dogelon and Australian Safe Shepherd are unfamiliar names in the cryptocurrency landscape that rose to prominence in recent weeks as investors turn at scale to high-risk micro-cap coins in the hope of making big money in a short space of time. 

Huge volumes of dog and Elon Musk-themed coins built on online memes are arriving on the market and reaching huge trading volumes despite their small market caps making for extreme volatility for investors. 

One key example of the volatility awash among these micro-cap coins can be seen in the Ethereum-based meme coin Dogelon (ELON), which managed to rocket 40,000 percent in a single day before undergoing a huge correction. 

The significant rise of the asset comes after a trend of Ethereum-based coins created in tribute to Elon Musk and various dogs emulating the increasingly popular Dogecoin cropped up with significant levels of trading volume attached. 

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 percent 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 rugpulls 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 percent 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 that happened to these meme stocks is nothing but speculation. The more information one can get, the deeper understanding one will have.”

Mainstream crypto’s backlash against meme coins 

The twisting and turning narrative surrounding meme coins ramped up recently when Vitalik Buterin, creator of Ethereum and crypto billionaire, donated a collection of meme coin shares amounting to $1.5 billion to various non-profit organizations around the world. 

Most significantly, Buterin transferred 500 ETH and over 50 trillion Shiba Inu (SHIB) - worth around $1.14 billion at the time of the transaction, to the India Covid-Crypto Relief Fund. 

Although it appears that Buterin’s offloading of dog-themed meme coins came after the leading name in the crypto space received vast unsolicited donations from investors around the world, the remarkable act of philanthropy has had a catastrophic impact on certain micro-cap coins, and particularly on SHIB. 

The huge transaction spooked investors, playing a key role in a 42.5 percent drop in SHIB’s price over the past 24 hours.

Some commentators have interpreted Buterin’s mass sell-off of meme tokens as a backlash against the rise of micro-cap coins. Due to the wild popularity of coins like Shiba Inu and larger meme coins like DOGE, Ethereum fees have rocketed to all-time highs as investors attempt to access their coins. The decision to sell off high enough volumes of dog coins, crushing investor confidence in meme tokens in the process, may have been a calculated move to ease the burden on ETH. 

As the cryptocurrency market continues to gather new interest and attract more investment, it’s likely that we’ll see many more meme tokens blink in and out of prominence. Although some may have the potential to make early investors some significant profits, it’s absolutely vital that investors conduct thorough research into the coins that interest them before parting with their money. Just like in the world of penny stocks, some investments can make holders rich, but many more fail to get off the ground.

Peter Jobes, tech, crypto, and blockchain writer

Peter Jobes is a tech & blockchain writer based in London. Published in VentureBeat.