What are shitcoins?
Learn what shitcoins are, how they work and whether you should invest in them.
Estimated reading time: 2 min
Due to the potential for losses, the Financial Conduct Authority (FCA) considers this investment to be high risk.
What are the key risks?
1. You could lose all the money you invest
- The performance of most cryptoassets can be highly volatile, with their value dropping as quickly as it can rise. You should be prepared to lose all the money you invest in cryptoassets.
- The cryptoasset market is largely unregulated. There is a risk of losing money or any cryptoassets you purchase due to risks such as cyber-attacks, financial crime and firm failure.
2. You should not expect to be protected if something goes wrong
- The Financial Services Compensation Scheme (FSCS) doesn't protect this type of investment because it's not a 'specified investment' under the UK regulatory regime – in other words, this type of investment isn't recognised as the sort of investment that the FSCS can protect. Learn more by using the FSCS investment protection checker.
- The Financial Ombudsman Service (FOS) will not be able to consider complaints related to this firm or Protection from the Financial Ombudsman Service (FOS) does not cover poor investment performance. If you have a complaint against an FCA regulated firm, FOS may be able to consider it. Learn more about FOS protection here.
3. You may not be able to sell your investment when you want to
- There is no guarantee that investments in cryptoassets can be easily sold at any given time. The ability to sell a cryptoasset depends on various factors, including the supply and demand in the market at that time.
- Operational failings such as technology outages, cyber-attacks and comingling of funds could cause unwanted delay and you may be unable to sell your cryptoassets at the time you want.
4. Cryptoasset investments can be complex
- Investments in cryptoassets can be complex, making it difficult to understand the risks associated with the investment.
- You should do your own research before investing. If something sounds too good to be true, it probably is.
5. Don't put all your eggs in one basket
- Putting all your money into a single type of investment is risky. Spreading your money across different investments makes you less dependent on any one to do well.
- A good rule of thumb is not to invest more than 10% of your money in high-risk investments.
If you are interested in learning more about how to protect yourself, visit the FCA's website here.
For further information about cryptoassets, visit the FCA's website here.
The cryptocurrency market has exploded in popularity; however, as with every great success, there are always people looking to exploit less experienced people. While the majority of cryptocurrency coins serve a purpose for either an associated blockchain or decentralised application, there are some cryptocurrencies that hold no real value. A coin that offers no real value is often referred to by many in the cryptocurrency community as a "shitcoin".
What is a shitcoin?
Shitcoin is a derogatory term that is commonly used to describe cryptocurrencies that serve no discernible purpose. Although the term is best used for coins that hold no value, it can also be attributed to any cryptocurrency based on personal opinion.
They can be a copy of another well-known coin or they can be a brand new project. There is no specific definition.
How do shitcoins work?
Since Satoshi Nakamoto introduced Bitcoin in 2009, interest in cryptocurrencies has skyrocketed. The success of Bitcoin has led many businesses to examine the advantages of blockchain technology. Many projects have created associated digital currencies. These cryptocurrencies, commonly known as altcoins, often incentivise many of the basic principles set out by Bitcoin.
Typically, the development team behind a coin will announce how many tokens they will make available. For example, Bitcoin's whitepaper states that there will only ever be a maximum of 21 million Bitcoin (BTC). Likewise, Ethereum's whitepaper states that Ether's (ETH) supply cannot exceed 18 million coins per year.
Such supply limits create scarcity. Investors know that a coin's supply will become limited after a certain point in time. Issuing more tokens than initially promised would dilute the value of investor holdings. When the supply of a cryptocurrency is fixed, its value should be dependent on demand.
As shitcoins serve no meaningful purpose, there is often no genuine demand for the token. The token's value is dependent on pure speculation. Shitcoins are digital currencies that people believe to be valuable simply because they exist.
What are the key signs of a shitcoin?
It is often easy to identify a shitcoin because many follow a specific pattern. When a shitcoin is first launched, the token may attract some interest, but its price remains relatively low. As interest peaks and investors jump in, prices spike high and fast. This is almost always followed by a nosedive in price. The sharp fall in price is caused by investors selling their coins to profit from short-term gains. This pump and dump process is often associated with shitcoins and can leave many investors stuck with worthless tokens.
Shitcoins usually have low market capitalisations (market cap). The low market cap makes it easy for a small number of investors to manipulate prices, raising them with very little effort.
The most obvious sign of a shitcoin is a lack of a well-defined function. Bitcoin was built for a decentralised payment network where financial transactions are secure, trustless and censorship resistant. Ether, the coin native to the Ethereum blockchain, is used to validate transactions and secure the network. Binance Coin, the token native to the Binance Exchange, is used to reduce fees on the Binance platform and power the associated Binance Chain blockchain. Shitcoins do not have such clearly-defined purposes.
Discerning a shitcoin is easier when looking into the background development and associated project (if one exists). Is the project a copy of an already-known cryptocurrency platform? Does the project have an associated whitepaper? Is the whitepaper copied from a different project? If there are contentious answers to any of these questions, the cryptocurrency could well be a shitcoin.
What research should you do before buying a cryptocurrency?
Although knowing the tell-tale signs of a shitcoin is important, knowing what to research before purchasing a cryptocurrency is just as important.
The following tips will help investigate any cryptocurrency project to determine whether it falls within the "shitcoin" category.
1. Thoroughly examine the project's whitepaper
When it comes to identifying shitcoins, a project's whitepaper is the most important resource.
The first thing you should look for is the availability of a whitepaper. If the cryptocurrency doesn't have a whitepaper, it is likely a shitcoin.
Second, look at how the whitepaper is written. It might seem trivial, but it is important that a whitepaper is written in flawless English. If you spot instances of low-quality English or numerous typos, you should question the legitimacy of the cryptocurrency. A high-quality cryptocurrency would invest in a well-written whitepaper.
Third, examine the promises made by the development team. Most people don't read the technical points of a project's whitepaper. Shitcoin creators know this and will, therefore, embellish the project's vision, roadmap and use cases. However, the underlying technology for achieving these proposals will never be explained. For instance, the whitepaper might promise that a project is "the next global payment system" but then fail to explain how that will be achieved.
Overuse of visuals is also another red flag. A whitepaper is intended to be the technical details behind a project. It is not supposed to be an easy read. When a whitepaper is overly visual and lacks technical solutions, you may want to be wary.
To help spot a terrible whitepaper, it is a good idea to become familiar with excellent examples. Solid whitepaper examples include Bitcoin, Ethereum and Cardano. Notice that these whitepapers contain the following:
- The project's vision.
- An overview of the problems the project aims to solve as well as the solutions the project will implement and why those solutions have been chosen.
- Details on the technical implementation.
- A credible roadmap for delivery.
- A specification of the associated cryptocurrency's initial coin offering (ICO).
- Technical information about the cryptocurrency's purpose, type, mechanism and tokenomics.
2. Look out for initial coin offering red flags
Initial coin offerings (ICOs) are a way for investors to gain early access to a cryptocurrency token. However, if an ICO offers a significant discount (more than 30%) for early investors, there is a risk that the cryptocurrency is a shitcoin. Allowing early investors to purchase coins at low prices gives them the opportunity to dump coins slightly above the ICO price and still make a profit. If a development team has faith in their cryptocurrency, there should be no need for a strong incentive to drive token sales.
Even if tokens are not sold directly after an ICO, offering a cryptocurrency at a very low price can result in a large proportion of tokens sitting in the hands of a few people. This is a guaranteed way to bring governance problems and political to a project.
Another ICO red flag is the lack of a product, demo or code. Although ICO's ask you to put your trust in the promise or vision of a development team, it is better to trust a team that shows what they are doing instead of one that only offers a whitepaper. Even for those not interested in tech, it is worth looking on the project's GitHub repository to see if it's active. If there are any demo products, they should be evaluated before any investment is made.
Researching the project's team members can also prove to be invaluable. What are their credentials and experience? If they have been involved in other crypto projects that have failed, it would instantly be cause for concern. Do they have a public social media presence? Inactive profiles are not encouraging. Are there any pseudonymous names like Satoshi Nakamoto used? The leadership team behind a project should not be anonymous. There is no reason for a project team to be anonymous unless they have something to hide.
Are shitcoins a good investment?
Shitcoins are generally terrible investments. They require huge risk and very rarely offer rewards. The majority follow pump and dump schemes where only a few "insiders" really understand the price dynamics. With no real value, after a pump and dump scheme, other investors are left with worthless cryptocurrencies. There is no denying that small-cap altcoins can produce high returns, but only if an investor gets extremely lucky and sells at the right time. There is a high chance an investor can lose all of their initial investment.
Where to buy shitcoins
As mentioned previously, shitcoins are extremely subjective. Any altcoin can be declared a "shitcoin"; therefore, it is difficult to give specific guidelines for where they can be purchased.
Most hold a small market capitalisation and are, therefore, not as common on larger cryptocurrency exchanges such as Binance or Coinbase. Exchanges such as these require coins to be officially listed, which means the project undergoes a thorough vetting process. Very few shitcoins make it that far.
Alternatively, lower market cap coins may be acquired through a decentralised exchange (DEX), where there are no restrictions on what coins can be listed.
Although subjective, here are some of the more well-known shitcoins within the cryptocurrency market:
- Dogecoin (DOGE). This is a meme-based cryptocurrency that was designed around a comical picture of a Shiba Inu dog called Doge. Much of the coin's success has been the result of influencer encouragement and hype.
- BitTorrent (BTT). BTT was a token built around the file-sharing platform BitTorrent. The platform was already functioning and existed without a token, which has led many to place BTT in the "shitcoin" category. The token supply is 1 trillion.
- Dent (DENT). DENT is a cryptocurrency used to purchase mobile phone packages. However, many believe the application does not require blockchain technology and actually functions better without it. It is seen by many as a way to "cash in" on cryptocurrency success.
- TRON (TRX). TRX was developed to power the Tron blockchain. However, some have questioned Tron's legitimacy as the whitepaper appears to be plagiarised.
- Shibu Inu (SHIB). Following on from Dogecoin's success, SHIB was developed as a token simply named after the Shiba Inu dog breed. It serves no purpose and is not associated with any blockchain or decentralised application. The maximum supply of tokens was set at 1 quadrillion.
Compare exchanges that offer altcoins
The bottom line
Shitcoins are risky investments that most cryptocurrency enthusiasts should steer clear of. For investors with large risk appetites, shitcoins may present an opportunity to make large profits. When investing in shitcoins, use the tips we have discussed in this article and ensure you fully understand the short-term and long-term potential of the coins. Once comfortable with the risks, invest small amounts and take profits regularly to avoid making a loss.
Cryptocurrencies are speculative and investing in them involves significant risks - they're highly volatile, vulnerable to hacking and sensitive to secondary activity. The value of investments can fall as well as rise and you may get back less than you invested. Past performance is no guarantee of future results. This content shouldn't be interpreted as a recommendation to invest. Before you invest, you should get advice and decide whether the potential return outweighs the risks. Finder, or the author, may have holdings in the cryptocurrencies discussed.
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