In the last year alone, cryptocurrency investors have lost almost $100 million at the hands of exit scammers through various projects promoting their shitcoins. During and after the recent bull run of 2020–21, the cryptocurrency market has matured to attract institutional investors across the board. But the shitcoin saga hasn’t slowed down a bit.
If cryptocurrency’s history has taught us one thing, it’s that every bull run brings along a shitcoin season with various pump-and-dump schemes, exit scams, rug pulls and get-rich-quick cons that deprive investors of their hard-earned money.
However, some shitcoins manage to produce phenomenal short-term returns. Perhaps the most famous example is the memecoins like Dogecoin, a Twitter-fueled shitcoin that rallied over 12,000% this year. This guide will discuss shitcoins and their history, ways to identify them, and whether or not they are worth your investment.
What Exactly Is Shitcoin?
Shitcoins are technically altcoins but become worthless over time, due to their flawed fundamentals. The coins have little to no value and do not serve any apparent purpose. They rely heavily on misleading marketing, mainly through a network of micro-influencers on social media.
Are all shitcoins bad?
Not necessarily as some of them are backed by a strong community. Think of Dogecoin is a decentralized cryptocurrency with a very large community. The name “Doge” originates from internet mem..., which started as a Bitcoin parody and wasn’t meant to serve any real-world utility. However, a strong community of Twitter warriors and influencers like Elon Musk pumped it to new All-time-high or ATH means the highest ever price of an asset. This term has been used in traditional financial markets,... levels during the 2020–21 bull run.
On the flip side, shitcoins do have its unethical side. Since the last bull run of 2017, when we witnessed the ICO boom, many things have changed in the cryptocurrency ecosystem as it has matured. This also means that the ways shitcoin projects steal money from investors have evolved.
Any shitcoin project today can be classified in either one of the following two categories:
In the aptly named rug pull, a cryptocurrency team abandons a project after raising a significant amount of funds from the investors, leaving them with worthless tokens. Rug pulls often happen on decentralized exchanges (DEX), mainly in DeFi projects.
Decentralized exchanges (Decentralise Exchange (DEX) is a crypto exchange platform that is built upon blockchain technology and negates the need ...) allow developers to launch and list their tokens without necessary audits or a vetting process. Malicious developers are able to list their tokens on a DEX (like Uniswap or PancakeSwap) and pair them with ETH or any other leading cryptocurrency. They also provide liquidity and lock a small amount of funds to gain investor confidence.
Now, this is where a rug pull comes in. Once a large number of investors swap their ETH tokens for the listed token, the developers then pull out all the liquidity (ETH), leaving investors with worthless tokens.
The listed tokens skyrocket in value during this process, up to 50X or even 100X within a few hours. This sudden rise in value creates a fear of missing out (FOMO) effect, bringing new investors. Once the value hits the ceiling, the team pulls out all the liquidity.
Exit scams are similar to rug pulls, but they don’t involve pulling out any liquidity because they don’t usually occur on a DEX. Instead, the team launches a project with a coin which is usually a fork, may it a soft fork or a hard fork of an already established project. They launch the project, sell the coins and then disappear.
A lot of exit scams were run in 2017, at the peak of the ICO boom. In a classic exit scam, the developers clone a leading project, make some changes and rebrand it, offering the coins through their platform in exchange for ETH, BTC, or any other leading cryptocurrency.
Once they accumulate enough coins, they abandon the project and let it run on autopilot. In both exit scams and rug pulls, big marketing budgets are involved in promoting the shitcoin. The marketing brings in new and naive investors, who are primarily driven by FOMO. These investors get rich on paper, seeing a massive appreciation in value; but in reality, they can’t cash out.
What Considers a Good Shitcoin?
Let’s talk about the “good” shitcoins now. Even though these shitcoins can’t be compared to some of the leading cryptocurrency projects, they are favorable in terms of their perceived value.
A subset of shitcoins is dubbed “memecoins,” inspired by viral internet memes. Memecoins are promoted heavily on social platforms like TikTok by micro-influencers. They have been recognized as a separate category among some of the leading aggregators like CoinMarketCap. Dogecoin is a memecoin inspired by the Shiba Inu dog which became a viral internet sensation back in 2013, dubbed the “meme of the internet.”
The History of Shitcoins
Most crypto terminologies like HODL and altcoins came from conversations over the famous Bitcointalk forum, and the term ”shitcoin” is no different. It was coined (no pun intended) by a Bitcointalk forum member in a thread initiated by Gavin Andresen (once known as the face of Bitcoin) on November 8, 2010.
You might be surprised to learn that some of the leading cryptocurrencies like Bitcoin, Litecoin, and Ethereum were all referred to as shitcoins by nocoiners. Charlie Lee, the creator of Litecoin, once said in an interview and on his twitter (with a touch of sarcasm) that Litecoin is the best shitcoin out there!
The history of shitcoins can be traced back to Bitcoin in which many small cryptocurrency projects were launched to deviate from Bitcoin but didn’t get to the mainstream, becoming worthless over time.
However, the shitcoin saga came after the launch of an Ethereum platform that allowed anyone to launch their tokens with just a few lines of code. As a result, people began launching a plethora of tokens with no utility or real-world use case.
Shitcoins see a significant surge in price when they’re launched, but over time, it’s all too often a flat line chart with no pulse.
Let’s look at two such examples: SALT and PPT.
At the time of its launch, SALT was trading for about $8. Within a month, it reached its peak with an ATH value of $16. That’s a nice 100% return, but what happened next?
The team abandoned the project, leaving it with no discernible pulse, valued at just over $0.30 at time of writing.
Another shitcoin is PPT. It traded at $1.90 at launch and surprisingly reached an ATH value of $74.85 within two months. That’s a lot of return, with a show of future promise.
However, here’s what happened next: the PPT team abandoned the project and it careened downhill from there, ending up with a flat line chart. PPT is still around and, at the time of writing, is valued at just over $2.50.
However, some shitcoins manage to defy death, reviving with the backing of a robust and vibrant community. The famous Dogecoin was taken as a joke, worth a small fraction of a penny at launch in 2013. However, at the start of the 2020 bull run, celebrities and influencers picked up Dogecoin and created massive hype around it. Dogecoin rallied over 12,000% in just a matter of months.
DOGE has become a Twitter sensation. Elon Musk, CEO of Tesla and SpaceX, has announced the launch of the “DOGE-1” satellite which will literally go It is used to describe a spike in prices. Indeed, a spike so big that it goes off the charts and goes all the way up to.... Not only is the name itself intriguing, but the entire satellite project was paid for in DOGE coin. Who would have thought a memecoin that started as a joke would go to the moon?
Many of the shitcoins coming up these days follow the memecoin mania because of Dogecoin’s unfathomable success. Unlike other established cryptocurrencies such as BTC and ETH, these memecoins generate a massive return in a very short period of time. But most of them have little to no liquidity, so there is no way you can cash them out.
Is Investing in Shitcoins a Good Idea?
There is a concept in traditional finance called “risk-return tradeoff,” which means that with an increased amount of risk, the chance of potential return rises. Investing in shitcoins is a high-risk/high-return proposition. You can make a lot overnight — or lose a big chunk of your investment pretty quickly.
There are shitcoin projects like Dogecoin and Shiba Inu that managed to generate over 12,000% returns in a very short period of time, but there are also projects which became worthless a week after their over-hyped launch. The returns can be enormous, but the risk is always there to consider.
All the shitcoins in the ecosystem have one common trait: they have flawed fundamentals. Therefore, the underlying technology or tokenomics doesn’t really matter. You have to rely on strong technical analysis, using various indicators to figure out buy and sell signals. The shitcoin market is so volatile that people often use bots, which can perform multitudes of trades in split seconds.
Aside from a strong technical analysis, there is one important metric that you need to consider: the community.
Shitcoin projects that manage to produce significant returns are fueled by the underlying community. This means supporters, celebrities, and influencers who pump up the value. Those shitcoin projects that are relatively new find it very hard to build a strong community. Older projects — with some legacy or a story attached to them — have an edge in community building. For this reason, they can be worth trying out.
Legit Coins vs. Shitcoins: How To Spot
Scammers and shitcoiners are getting more and more sophisticated in their strategies. Their coins can closely mimic legit coins in order to gain investor confidence. Here are some of the characteristics you can look at to spot a shitcoin:
Project Background and The Team
The biggest differentiating factor between a shitcoin and a legit coin is the team behind it. Before investing in any project, you should look at its team, and at their backgrounds and work histories. Shitcoin projects often have shady team members with no work histories, and perhaps phony social profiles that are created just for their project.
Whitepaper and Documentations
Compared to legit coins, shitcoin projects don’t have proper documentation (like white paper). Their statements are vague, with false promises for a better future.
Legit coin ventures focus a lot on documentation and they don’t talk about token price. Instead, they talk mostly about the underlying technology — and particularly how they aim to improve it over time to increase the adoption of their products. Shitcoins have very little documentation, instead of focusing entirely on token price.
Check-in With the Community
Every legit coin has a strong and vibrant community. Substantial shitcoins like DOGE are also backed by a community, whereas the proprietors of bad shitcoins don’t focus much on their community building. There is always the possibility they may attempt a rug pull as soon as they can in order to steal funds from investors.
The Bottom Line
The shitcoin mania isn’t going to slow down anytime soon. Before investing in a shitcoin project, perform your proper due diligence to identify the good players from the bad ones. Some shitcoins are created as a joke, but they may still aim to build a strong community. Others are specifically engineered to steal investors’ funds.
Shitcoins have a very high risk/return tradeoff, so invest wisely to avoid losing a big chunk of your hard-earned money.