What are Blockchain Penny Stocks and Should You Invest in Them?

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Equities are one the most popular asset classes as they have created massive wealth for long-term investors. For example, the S&P 500 has generated average annual returns of 10% in the last five and a half decades easily outpacing inflation.

However, even while investing in this asset class, there are several types of investors out there. Investors with a lower risk appetite generally buy indexes such as the S&P 500 or NASDAQ. They might also look to invest in blue-chip dividend-paying companies that are generally recession-proof and have a low beta score.

On the other hand, high-risk investors might bet on growth stocks that generally outpace broader market gains by a huge margin. These investors might also buy stocks in emerging sectors such as cannabis, artificial intelligence, or electric vehicles among others.

Finally, there are day traders with a large risk appetite who look to buy and sell penny stocks. These are stocks trading at a price of less than $5 and are available at a bargain.

Risks and benefits

There are several reasons why investing in a small-cap company is a good bet. Companies that are smaller in size but are part of a high-growth vertical have significant potential to derive large investment gains.

Alternatively, penny stocks are cheaply priced for a good reason. These companies are unproven and are subject to market manipulation especially in stocks that have low liquidity.

Blockchain penny stocks have been on an absolute tear

However, in the last year, several penny stocks in the blockchain space have exploded and easily crushed market returns. The prices of Bitcoin and peer cryptocurrencies have touched record highs on the back of institutional investments and wider adoption all around the world.

In the last few months, companies such as Tesla, Square, and MicroStrategy have held Bitcoin on their balance sheet contributing to the rapid gain in the world’s most popular digital currency.

Bitcoin has surged 1,000% in the last year and is now valued at a market cap of over $1 trillion. This means it has a higher valuation than tech giants such as Facebook, Alibaba, and even Tesla.

This rapid rise in market cap has also sent shares of bitcoin mining or blockchain companies sky-high. Let’s take a look at a few penny stocks that have gained exponentially since March 2020.

Grayscale Bitcoin Trust

The Grayscale Bitcoin Trust is the largest digital asset management company in the world. It holds approximately 650,000 Bitcoins which is 3% of the total Bitcoins in circulation right now. At the current price, these Bitcoins are worth around $38 billion.

This trust was launched back in 2013 with a minimum investment size of $50,000. It has an annual fee of 2% and this stock that is traded on the OTC market has returned over 9,500% since May 2015.

Shares of The Grayscale Bitcoin Trust were trading at $0.54 in May 2015 and closed trading at $51.99 on March 17, 2021.

Riot Blockchain

Riot Blockchain focuses on building and operating a blockchain ecosystem. It’s involved in the mining of digital currencies- primarily Bitcoin. The company aims to be one of the lowest-cost producers of Bitcoin in the U.S.

In the first nine months of 2020, the company mined 730 bitcoins, compared to 803 coins mined in the prior-year period. The average Bitcoin value stood at $9,064 which means it generated revenue of $6.7 million in the last three quarters.

Shares of Riot Blockchain were trading at $2.29 in March 2016 and have returned 2,700% in the last five years.

Marathon Digital Holdings

Another company part of the crypto mining space is Marathon Digital Holdings. Valued at a market cap of $4 billion, this company is forecast to generate revenue of $195.7 million in 2021, significantly higher than its revenue of $4.36 million in 2020.

Shares of Marathon Digital Holdings were trading at $3.2 in June 2017 and have since returned over 1,200% in less than four years.

The key takeaways

We can see why penny stocks are attractive to retail investors. However, the SEC has also warned, “Investors in penny stocks should be prepared for the possibility that they may lose their whole investment”.

These fears are further exacerbated when you invest in blockchain or bitcoin mining companies such as the ones mentioned above. The stock prices of bitcoin mining companies and even the Grayscale Trust are closely related to the price of cryptocurrencies.

For example, when the price of one Bitcoin fell from $19,650 in December 2017 to $3,400 in December 2018, shares of Grayscale Bitcoin Trust were down 87%. Comparatively, shares of Riot Blockchain and Marathon Digital Holdings also fell by 95% and 93% respectively in this period.

While Bitcoin is gaining adoption at a rapid pace, its still unregulated and subject to volatility. In case you are bullish on the cryptocurrency space over the long-term, it makes sense to allocate a small portion of your total investment capital to this highly disruptive space.