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If the Cap Fits: Penny Shares vs Cryptocurrency

Posted 07 July 2017 If the Cap Fits: Penny Shares vs Cryptocurrency
Written by Jon Gulson

The common factor between penny shares and cryptocurrency is the potential for accelerated growth. Everyone loves to buy investments at pennies on the pound and witness them multiply. Anyone who has been around the cryptocurrency block would have seen this happen more than once.

Capitalising Risk and Value
Considering what constitutes penny stock and the standing of a cryptocurrency includes market capitalisation (or market cap). With a penny stock, this is the value of floating shares (or shares in circulation) multiplied by their share price.

A company floating on the stock market is regarded as a smaller company if its market capitalisation is less than £100m, which makes them high risk: they become vulnerable if markets or trading conditions are difficult. To put this into context, HSBC’s market cap is around £140bn.

Like a penny stock, cryptocurrency can also be measured by market capitalisation; at the time of writing, bitcoin is the largest cryptocurrency at $40bn cap, followed by Ether (token of the Ethereum blockchain).

To put this into context, Apple has a market capitalisation of approximately $780bln and Google around $650bln.

Market capitalisation however can be mis-leading when comparing currencies to stock, although it gives an idea to how crypto has matured into something more than a concept. For example, high risk in penny stocks is taken to mean the potential for catastrophic or total loss of investment.

Market capitalisation in a cryptocurrency therefore provides a starting point to the standing of a coin and how value is derived.  

Relative Growth
Like many penny shares, cryptocurrencies are still relatively unknown. And at the moment - compared to the US dollar - bitcoin can look like a rounding error.

When quantifying the fiat money supply, measures go from M0 to M4. M0- M1 is regarded as narrow money and the most liquid, including cash and coins in circulation or instruments easily convertible to cash. M4 broad money, includes all money in circulation.

To put this into context, approximately $4tn is traded daily in the United States. It is estimated today, the world’s total M4 supply is c. $90tn. The total market capitalisation of cryptocurrencies is c. $100bn. This means plenty of scope for growth.

Instead of comparing cryptocurrencies to shares when considering size, compare it to money in supply. Money is considered money when it is a unit of value; store of wealth; medium for exchange. Where interest rates in money are at historically low levels, the growth potential of cryptocurrency becomes apparent. 

In the UK for example, money on account will attract interest between 0.1% to 0.5%. Inflation is currently running at around 2.9%. This means in three years, the store of value of every £1 kept on deposit evaporates: every unit of sterling kept on account dissapears.

So when considering cryptocurrency for growth: if the cap fits, buy some.

Written by Jon Gulson
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