This article will define what is Shitcoin, how they came to be and some practical methods to detect them. Unfortunately, it is quite a considerable threat for the cryptocurrency market. However, a vast majority of shitcoins have the same behavior and can easily be identified.
Generally speaking, any cryptocurrency or digital currency must first have utility. They maintain a purpose and provide practical utility toward the purpose. Secondly, based on the pragmatic capabilities of the currency, they have a certain value.
In that regard, value, and utility are two primary qualities preserved for solid cryptocurrencies and digital currencies.
Shitcoins are all those who lack both utility and value. They are worth next to nothing in terms of value. However, utilizing certain methods, the creators can hold the value as high as possible for a short period of time. In other words, they create a bubble that will eventually burst.
AT this point, it is worth taking a look at the methodology of creating, pumping and dumping a shitcoin.
Shitcoins and their promises
Following the introduction of Bitcoin in 2009, many attempts were made to create altcoins with pretty much the same characteristics. This creation would provide the creators with absolute control over their cryptocurrencies.
Primarily, all currencies have a limited supply. It is essentially the limit that creates scarcity, therefore keeping the value high or increasing it by demand. For example, Bitcoin’s supply is limited to 21 million. In case the supply grows, the increased quantity of that currency will dilute the value, causing decrease. In that regard, the value will decline due to the low scarcity.
With that perspective in mind, Shitcoins keep the demands high hence the high value. But at some point, due to the lack of utility, the bubble will burst.
It all begins with an Initial Coin Offering (ICO). A network introduces itself and set up a first sale of their coin. Before this even takes place, the creators are the only owners of the coin. With the ICO, the first wave of demands, shoot the price high as the creators accumulate on large sums of money technically overnight. Basically, it is the marketing techniques that assure the high demand.
It is almost impossible for any cryptocurrency or digital currency to have great utility in the beginning. Therefore, the glorious promises of their success is the prominent factor for the demand. Investors are seldom greedy; they are looking for the highest profit in the shortest amount of time.
Many Shitcoins fail shortly after their ICO. The creators make a massive amount of money following the offering and sell almost all their coins. To put it simply, they dump the market following a successful pump.
On the other hand, there are some cryptocurrencies that stay around for a long time after their ICO. They utilize highly effective marketing techniques and sell the promise of developed future applications. Again, these marketing efforts will provide high demands for the coin.
One recurring pattern for Shitcoin is the fact that, numerous pump events can be tempting for the investors. Say you hear about a certain cryptocurrency that has had more than a handful of massive pumps. In that case, despite knowing the risky nature of the coin, you might still invest.
While all this is happening, the skyrocketing of the price does two things. First, inflation within the value increases drastically, the bubble grows bigger. Second, with the massive and sudden rise in inflation, volatility grows like crazy! Much like any other ecosystem in the world, entropy increase within the system and very soon, chaos will ensue.
As for the last step, the bubble will burst, a sharp plunge in price liquidates all the long positions on the cryptocurrencies and lowers the value of people’s investments. This sobering decline hits the investors with the realization that any second they hesitate to sell the coins; they will lose more money. Hence the sellout and the negative demands bring the price to nothing.
Taking a look at the primary plunge in price that initiates the downfall, most of the times it is the largest investors (whales) that are the creators themselves.
A classic example of a shitcoin is Bitconnect.
Do not Fall Prey to Shitcoin
By dissecting the common fraudulent methodology of shitcoin, we can highlight some of the recurring patterns and universal elements. These patterns and elements can help us investors detect the same cases in the future and avoid them.
To begin with, ICO’s are risky. Sure, they promise of great rewards in a short time but one must consider both sides of the spectrum as one can lose all the invested money. If you are interested to take part in an ICO, make sure to do adequate research looking into what the cryptocurrency promises to do, who the creators are and how are they going to achieve their goal. According to your own judgement, is it possible that they can realistically fulfill their promises? If the creators are anonymous, can you put your faith into masked strangers?
The biggest contribution factor that everyone must consider however, is marketing. If the company is selling you their vision of the future, take it with more than a grain and even more than a pinch but a fistful of salt. The marketing statements are always primarily for profit and increasing the demand. The marketing statements are not concrete and guaranteed promises. Unfortunately, Shitcoins sometimes have a cult like following on social media. In some cases, it is proven that the company members and staff were managing and leading the fan pages and pump events disguised as independent investors.
Lastly, do not go all in. There is so much information that the investors are unaware of. There are numerous contributing factors to the value. Investors do not have all the data.
Remember Murphy’s law, anything that can go wrong, will go wrong.
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