Are penny stocks and altcoins lottery tickets?

Jun 11, 2021

Can cryptocurrencies be considered lottery tickets? You betcha.
What is a lottery ticket? It’s a low-cost token you buy for an infinitesimal chance for an imagined big reward. Sounds similar to today’s crypto market? No? It sure sounds to me like buying an altcoin for $0.000036 in hopes it goes to a buck. Many altcoins and penny stocks can both be thought of as “lottery” assets because they are high-risk, have no real intrinsic value, and only offer a low probability of winning a large reward.

But why is it so tempting to throw your hard-earned money at these? The short answer is because we humans are both (a) easily excitable by opportunities for gain, and (b) seriously bad at probability estimation. Mix this disposition with witnessing massive gains all over the news, triggering behavioral anchoring and the decoy effect, and most hot-blooded humans will find the opportunity irresistible. Additionally, most of us are ripe and pliable targets for manipulation by others (not to name anyone but, ahem, Elon Musk), which only makes the situation worse.

But are all low-priced assets bad investments? No, there are opportunities if you know where and how to look for them in both ICOs (Zhang et al. 2019), and small-cap IPOs (Bradley et al. 2006). If you want to invest meaningful amounts of money in lottery assets, do the commensurate due diligence before and during the investment period to check the odds are actually in your favor.

If you can’t resist the urge and don’t want to do your homework, then only buy a small amount that you’d be ok with if it went to zero. Then, don’t be surprised by theurge to act irrationally, and definitely don’t double-down by “loss chasing” when/if it tanks.

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