It is an unpleasant phrase, but one that is used quite frequently in the crypto sector. But what is a shitcoin?
Investopedia defines a shitcoin as any altcoin (a cryptocurrency token other than Bitcoin) with little use and no discernable purpose.
It is often the term given to tokens promoted in pump-and-dump schemes, where creators lure in investors before selling at a peak price, causing the token’s value to plummet.
Any token perceived as a bad investment because of a lack of use case or suspicion about pump and dump is termed a shitcoin.
Shitcoin Media Frenzy
Shitcoin creators piggyback on the media frenzy surrounding Bitcoin and cryptocurrency generally since it hit the big time in 2017.
They build on the public interest and investors’ FOMO (fear of missing out) by creating hype around virtual useless crypto tokens, with flash graphics, active social media accounts, viral memes, and, occasioanlly, celebrity endorsements.
Sadly, many investors have fallen for this. After witnessing others make huge returns on the launch of trending tokens, they don’t want to be left behind.
The hype helps pump the price. Then the creators dump their holding. The price crashes.
Shitcoins are the antithesis of the philosophy behind cryptocurrency and decentralised finance (DeFi). An open and transparent financial system beyond the control of an individual, small group, institution, or government is the concept. Shitcoins are often shady Ponzi schemes that fly in the face of that ambition.
How to Spot One
Identifying shitcoin projects isn’t all that difficult.
Price action often remains steady immediately after launch before investors climb on board. Once the hype train leaves the station, the price accumulates rapidly before nosediving as the project creators cash in on their gains.
Shitcoin projects tend to lean heavily on marketing and are hyped by social media influencers. While this isn’t a crime, an overabundance of hype would generate a red flag if I was looking to invest.
Rug Pull
Shitcoins and the associated pump-and-dump and rug-pull schemes have given crypto a bad name and poor reputation.
If we want to see DeFi principles and technology adopted worldwide, we in the industry must do more to combat fraud.
There is some evidence that investors are wising up to shitcoin schemes, but millions of dollars were still lost to crypto scams in 2022.
I have long advocated for considered, enforceable regulation to make the crypto space safer for consumers. It seems that steps are being taken now, sadly only as a result of last year’s collapse of crypto exchange FTX.
Educating and informing investors is one way to enhance protection against crypto scams.
Realistically, however, comprehensive industry regulation is the best way to tackle fraud schemes. While policy is lacking, the shitcoin strategies continue to play out.
Why Do People Invest?
Considering the risks and awareness of such scams, why do investors still get involved with shitcoins?
Many traders will not look outside the top 100 coins when placing their money. It is a safer way to invest.
However, what one person sees as a shitcoin, another sees as what could be the next 1,000x altcoin. New coins have hit the market surrounded by hype, with comical names and graphics, with no obvious purpose, and not been a scam. Some are still around and have made returns for investors.
But there are few examples of this. Yes, you may be lucky and generate a 1,000% return, but you are far more likely to lose the lot.
If you are engaged in speculative trading – in fact, any crypto trading – please do not risk more than you can afford to lose.
DYOR
If you are considering investing in cryptocurrency, do due diligence and conduct thorough research. As is commonyl said in crypto, “DYOR” (do your own research).
The industry is littered with tales of scams, rug pulls, and hacks. It is imperative to make confident decisions based on your own detailed research.
Shitcoin Conclusion
From $TRUMP to an actual token named $SHITCOIN, there are thousands of shitcoins on the market looking to take advantage of naive investors and gullible traders.
Make sure you are not on the receiving end.
