The term ‘shitcoin’ is an umbrella covering all the spin-offs of failing or already failed cryptocurrencies. Usually devoid of any identifiable purpose, these currencies have no basis for existence and lack fundamentals to back them. Since their purpose is undefined, unlike Ether and Bitcoin, these coins have no longevity associated with them.
The most famous example is Dogecoin. Dogecoin was ‘forked’ from Litecoin in 2013, or conceptualised as a fun currency. It was created as a meme coin and had its appeal restricted to the Shiba Inu dog breed featured on its logo.
What gives shitcoins value?
Shitcoins derive value solely from existence. Upon launch, the speculation surrounding their creation results in an influx of investors who pump in money. Mass purchasing drives the price of these coins exponentially higher in a brief period.
Once these investors cash out to make short-term gains, their price nosedives as quickly as it had risen. Once all immediate gains have been realised, the price of shitcoins remains at the same level without showing much movement. This pump-and-dump trend often leaves unsuspecting novice investors with a load of worthless shitcoins.
For instance, Dogecoin draws its value from the tweets of the wealthiest person on the planet, Elon Musk. Without his backing and publicly shared opinions, the coin’s value would not be based on anything. Moreover, the CEO of Tesla has also announced that the company will accept payments in Dogecoin on a payment-trial basis.
How can investors identify shitcoins?
Shitcoins exhibit several prominent red flags despite the developers’ attempts to conceal them. Here’s what one should be on the lookout for:
Shady developers: Cryptocurrency developers, if visible in the public eye, command enough trust from the masses and add legitimacy to the freshly launched crypto. Developers without a face are inevitably dubious and likely to defraud people.
Undefined functionality: Blockchains like bitcoin and ethereum were designed to improve decentralised finance (DeFi) by removing a central authority and enhancing transaction security. BTC and ETH are thus stores of value due to the utility they offer. Shitcoins have no such underlying purpose and solely exist because they can.
Generic projects: If the project makes big promises but has no defined functionalities, it is likely to be a shitcoin. Such project websites are usually hosted on free domains, riddled with typos, and even casually designed.
Few holders: The norm suggests that a legitimate cryptocurrency must have at least 200-300 coin owners. Any number below the lower end of this range indicates sinister activity. A healthy coin worth investing in must also display 5-10 transactions per minute.
Dry liquidity pool: A newly-launched decentralised exchange heavily banks upon the liquid funds. Less than $30,000 in liquidity is a glaring red beacon that you must steer clear of. The coin may even list at surreal discounts to the tune of 30 percent, which is not sustainable.
What should you check before investing in a cryptocurrency?
Existence of a project whitepaper: A whitepaper proves the project is authentic. Without it, the cryptocurrency loses its validation. The quality of the whitepaper is equally important. An unprofessional structure, lack of coherence and frequent typos are reasons to question its legality.
Check the developer’s promise: As layman investors, most of us tend to skip over the technical details, assuming they will seem undecipherable. However, it is the one habit that swindlers exploit and overembellish the content. It may state that the project will achieve an end goal but fail to explain how.
As a reference, investors should go through the whitepapers of Bitcoin, Ethereum, Cardano and Polygon.
What are the biggest shitcoins in existence today? (per CoinMarketCap Data on December 21)
Dogecoin – Price: $0.1707, Market Cap: $22.64 billion
Shiba Inu – Price: $0.00003226, Market Cap: $17.7 billion
Magic Internet Money – Price: $1, Market Cap: $1.93 billion
Safe Moon – Price: $0.00000153, Market Cap: $887.8 million
Dogelon Mars – Price: $0.00000097, Market Cap: $612.8 billion