Trading Micro Cap Coins: How to Reduce Risks and Increase Profits

Advice from crypto-trading veterans on the riskiest assets in the crypto space

Micro cap coins — cryptocurrencies with a market capitalization of less than $50 million — are one of the most often misunderstood assets on the crypto market. Long-term investors tend to be wary of them, with good reason, but traders with higher risk tolerance stand to gain immensely from these small but powerful altcoins.

The pros and cons of micro cap coins

Let’s start with the obvious. Cryptocurrencies are volatile, high-risk assets and micro cap coins even more so. In a sense, they are the penny stocks of crypto, which means they should augment, and not be the basis of your crypto trading strategy.

However, with a strategic approach micro cap traders can get exponentially better returns than they can with bitcoin and other digital currencies. Especially in Alt-Season (which may arrive soon, by the way), micro cap coins can see gains as high as 1000%.

Another plus is that many of these coins are less well-known, which means you are less likely to be in direct competition with hedge fund supercomputers when analyzing, buying and selling them.

Micro caps are also a good option for those looking to get involved with a blockchain project they like in the early stages — many micro caps have only recently passed the ICO stage.

Nik Patel, an author of “An Altcoin Trader’s Handbook”, shared his expert’s opinion:

The first downside to microcap trading is that you have to be far, far more meticulous in your initial research, particularly concerning fundamentals, as the potential for scams/developer abandonment is greater than usual, and thus the inherent low liquidity in microcaps can lead to being stuck in a position without any way of exiting. The second downside is this lack of liquidity. Due to the nature of a microcap, volume is often very low and this liquidity is low. Small buys can move price significantly. Thus, patience is an inherent aspect of microcap trading. You need to buy slowly over a longer period of time in order to get an adequate price, and the lack of patience is where the most trip up.
However, the primary advantage is, of course, the profit potential (given thorough analysis and sound risk management). Where largecap alts might move 5–10x in a bull market, at the very most, microcaps are often the 100x+ stories you hear about. Coins that begin at microcap valuations and go on to midcap or even largecap status are the ones that can actually change a person’s fortunes; where those who begin with little starting capital can turn it into life-changing money. Of course, the caveat is that most fail in this pursuit as greed is heightened when dealing with such returns, and thus otherwise rational people make emotionally-charged decisions. This is actually where low liquidity can be of benefit to an individual: where one might panic sell a largecap if price moves away from an entry, those positioned in microcaps often don’t even have the option to do so, and thus strong hands are compulsory, with many having to wait until a new bull cycle to exit their position, thus keeping them from making emotional decisions. Another advantage to microcap trading is the ease of analysis. Microcaps are often the most easy to keep track of, as there is simply less going on in the rich-list, the development, the community and the chart. This leads to more accurate evaluation of a project’s strengths and weaknesses, and thus a better understanding of what constitutes a good entry price; a good entry price is paramount for success in any form of investment or trading

Dennahz, one of the experts in crypto-trading, share his opinion about pros and cons of micro caps:

Pros:
- You’re ‘early’ with a micro-cap. Not many people know about it (unless the quality of the project is garbage and it’s literally a shitcoin, of course);
- Most micro-caps I trade are undervalued — you can see it as ‘gems’ with lots of potential growth;
- Like I said: upside potential!
- You don’t need to invest a lot to have a potential big win.
Cons:
- Lots of scams;
- Can literally go to 0;
- More risk, micro-cap usually means a small/one man team;
- Usually bad liquidity, so can’t buy a full position at once, or sell it all when / if shit hits the fan.

How to integrate micro caps into your trading strategy

The same fundamentals apply here that apply to trade other cryptocurrencies — the first thing is to find a coin with solid foundations. These are the only coins you can reasonably expect to grow in value. Don’t buy a weak coin just because it’s attractively priced. If a business seems to be making tokens for tokens’ sake, that’s a red flag. Not every business needs a token, and if they’ve issued one just for the “cool factor”, that’s not a coin you want to buy. It’s true that micro cap coins tend to be used more in day trading than held as long-term assets, but still doesn’t mean you should buy a bad or uninteresting asset.

Most popular crypto websites publish lists of micro cap coins with interesting fundamentals fairly regularly, which can be a great jumping off point for your search.

A professional trader Bitcoin Master shares his experience in trading micro caps:

Especially in Alt-Season (which may arrive soon, by the way), micro cap coins can see gains as high as 1000%. — 1000%? If you do your homework and buy the best and most promising altcoins before an ICO or during a period of accumulation, your average gains can be as high as 2,000% Frankly I also took a loss of 80% in the bear market but from the start of 2017, I’m still at 7,400% gains.

More from Dennahz on his hybrid approach when it comes to micro caps:

I do trade micro-caps myself — but like I said, i’m more an investor than a trader. I’m the ‘buy low, sell high’ kind of guy. And that selling part can take a while after buying a coin. My favorite part of this game is to spot potential in a coin that not many people know about yet. Keep yourself informed about those projects, because they’re very sensitive to news and because of the bad liquidity there can be big gains/losses within a couple of minutes.

Nick Patel’s shares strategy in trading micro caps:

In essence, I look for coins with low inflation rates and zero or near-zero premises that show signs of accumulation, both on the chart and in the rich-list. If these signs are present, and the coin is otherwise fundamentally sound, I look to the chart for cues on where to find a good entry, often picking entries within tight price ranges that form over a long time-period at cyclical lows. These are the opportunities that present the greatest upside potential with minimal downside risk, which is the aim of microcap trading. More on the process can also be found in my book, “An Altcoin Trader’s Handbook”.

Choosing a High Growth Potential Micro Cap

There are a variety of indicators which could mean your micro cap coin is a winner, but potential can be a tricky thing to judge. The first thing you’ll want to do is check out the community — even the best coin idea won’t go anywhere without an engaged user base and active devs. You can get a feel for a coin’s community by going to Bitcointalk.org, checking out the whitepapers, evaluating the level forum activity, etc. You may also want to vet the devs on LinkedIn (devs without LinkedIn profiles = a major red flag).

Bitcoin Master touches upon his micro caps trading strategy:

Think of micro cap coins as traditional startups and act like an angel investor. Expect zero to bad ROI from nine of your holdings, but the tenth one can bring you a thousandfold in profits. In any case, don’t put all your eggs in one basket. I think of myself as a high risk altcoin investor at 35% of crypto portfolio in altcoins, 30% in Bitcoin and 35% in fiat. Of course I use the BTC and fiat for day trading.
Not only solid foundations, find the coin that is better at innovation — faster, cheaper, more efficient, more use cases or more user-friendly is your target. Throughout tech history, old models always die of obsolescence — crypto is no exception. Of course, investing in unproven tech and early projects is very risky since it has a greater chance of failing. That’s why you diversify. But when you hit the jackpot, oh boy, the returns.
I think you should visit Bitcointalk’s Altcoin section. In the four years that I’m buying and selling altcoins, it has always been the best place to look for hidden gems — the comments from Bitcoin Master on where to find the best micro cap coins out there.

Once you’ve found some solid looking coins, it’s time to crunch the numbers.

Micro Cap Analysis

You can do technical analysis on micro cap coins the same way as other cryptocurrencies and other financial markets in general. As micro cap coins behave similarly to penny stocks in traditional financial markets, you can apply many of the same strategies. But more on that later.

To get started, you’ll want to go down your list of vetted coins and compare their current price with other coins that have a similar supply, to get a sense of growth possibilities. Tools like Coinmarketcap can help you here.

Next, check trading volume. The 24hr volume should not be less than 2% of the market cap. If any of your selected coins don’t meet this criterion, remove them from your list.

Once this is done, it’s time to break out the charts. You can find these online, or if you want to minimize time spent switching between windows, Kattana allows you to open them in your own desktop trading terminal.

A market scanner in Kattana, professional crypto-trading terminal.

Once in the terminal, there are an array of functionalities you can use to conduct analysis. As we mentioned earlier, micro caps are not generally long-term hold assets, so its best to apply day trading analysis techniques here.

We’ll take a look at a few of them now.

Multiple Time Frame Analysis with Indicators

Multiple time frame analysis can be used to evaluate both long and short-term assets. To do this in Kattana’s Market Scanner, where you can select the amount of charts you need and set them up to display the time frames you need (for micro caps, you most likely want a daily, hourly and 15 minute frame). From here, you can plan your entry and exit points based on the overall trend.

Moreover, you’ll be much better off by using technical indicators, such as Moving Average Convergence Divergence (MACD) or Relative Strength Index (RSI). Those are popular tools for identifying if a crypto asset’s overall trend is bullish or bearish and useful when it comes to finding entry and exit points for your positions. We won’t go too much into the math behind those indicators here (there are plenty of resources online that cover it in detail), but basically MACD uses moving averages to determine trends while RSI measures the magnitude of recent price changes to spot overbought or oversold market conditions.

Kattana provides an easy-to-use indicators interface in Market Scanner and Chart Widget that helps you compare its metrics across different time frames and trading pairs without hassle.

Multiple Time Frame Analysis in Kattana, professional crypto-trading terminal.

Follow the pumps

Pumps are difficult to predict by nature, but it’s not impossible. And because micro caps can be very vulnerable to pump and dumps, it’s worth having a strategy in place to detect them — if you catch them well enough in advance it can be very profitable. It’s advisable to use your trading platform in conjunction with anomaly detection algorithm, which can help you detect these. But be aware, this takes above average technical expertise to implement.

If anomaly detection sounds a bit intimidating, you can also use old-fashioned sentiment analysis to detect, avoid, and benefit from pumps. If you’re getting bombarded by PR and spam emails promoting a micro cap coin, that can be a warning sign.

Pump identification on Kattana’s market scanner chart.

Conclusion

Knowledge is power in crypto, and we hope you now have a better picture of what micro cap coins are and if they’re a fit for your portfolio. These coins are risky assets, but can provide exponential returns to the well-informed trader. What we’ve covered above is far from exhaustive list of micro cap trading strategies, but it should help those new to these exciting assets find their footing.

If you’d like to take your crypto trading to the next level, why not sign up for the Kattana waitlist? We are releasing beta in the late November with limited amount of spots.


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Kattana is a professional trading terminal for blockchain assets, created by traders for traders to bring individual cryptocurrency trading to a pro level. Trade on multiple crypto-exchanges with the whole range of pro tools, from market analysis to measuring trading performance, available in one place.

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Let us know what was your experience in trading micro cap coins and how you integrate them into your trading strategy in the comments below!

The Kattana Team