How to Identify and Avoid 'Shitcoins' in the Cryptocurrency Market

Stories are cropping up all over the world of people who hopped on the crypto trend early, got rich quickly and are now living the life of a millionaire. The stories are especially compelling as these people are average folks — it's easy to imagine yourself in their shoes.

Take, for example, Glauber Contessoto. The 33-year-old invested his life savings — $180,000 — into Dogecoin after Elon Musk tweeted about the cryptocurrency. He'd been watching the coin for some time, noticing the online support that the coin received. At the time, Dogecoin was worth about $.04. In just under three months, his investment became worth $1,081,441.29. So, how did he know this was the right coin to invest in, and not a "shitcoin" as those around him were saying?

What are "shitcoins"?

"Shitcoin" is the term given to cryptocurrency that's useless and has no value. These cryptos were created as copycats — currencies that have brought nothing new to the crypto space. They don't have clear goals. Unlike Bitcoin or Ethereum, which came about with specific, defined purposes and innovative goals, shitcoins lack functionalities. For this reason, they don't have the longevity of other coins.

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The risks of shitcoins

As of January 2021, there are over 4,000 cryptocurrencies on the market. They can't all be on the level of Bitcoin, Binance or Tether. In the stock market, there are good and bad investment opportunities, and the same can be said of cryptocurrency. Many shitcoins are created to capitalize on people who are jumping on the crypto bandwagon without doing their research first. Their value is based on speculation and little else.

Plenty of people have lost money to shitcoins — from hundreds to thousands of dollars. Hearing stories like that of Contessoto can make purchasing cheap, lesser-known crypto extremely temping. The risks of investing in crypto are similar to those of investing in the stock market. You should never invest more than you can afford to lose, and you should always do your research first.

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How to spot a shitcoin

• The developers are mysterious. The people behind a project should be trustworthy, not a random group of strangers using fake names. You wouldn't invest in stock from an anonymous group, would you? The same applies here. If the developers have identified themselves by video on Instagram or Youtube, for example, they're considered doxxed and much more trustworthy. With their appearance known by the public, it's much less likely to be a scam.
• The project has big promises, but has no defined functionalities. Anyone can come up with impressive-sounding goals and promises. However, not just anyone can provide the roadmap as to how those objectives will be accomplished. If a project avoids defining the functionalities, it's not trustworthy.
• Aspects of the project seem copied or generic. If a project's website looks generic or uses a free domain, that should be a red flag. It signals that it lacks the authenticity of a true, well-developed project. Additionally, if the white paper is indistinguishable from that of other popular projects, it's likely a copy made to trick people into feeling secure. Alternatively, if it's technically written with such jargon that it's hard to understand, it's likely a shitcoin.
• Check the number of holders. Experts say any new coin worth investing in should have 200 to 300 holders, at a minimum. Any coin that doesn't meet that minimum isn't healthy and isn't worth investing in. Similarly, any healthy new coin should have five to 10 transactions per minute.
• Consider the liquidity pool. The liquidity pool is considered the backbone of most decentralized exchanges. If the project you're investing in doesn't have at least $30,000, it's likely a shitcoin. Low numbers — like hundreds or a few thousand — should be a warning sign.

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At the end of the day, many of the rules that apply to the stock market also apply in the crypto space. Two key lessons will ensure you invest well: Research before you invest and never invest more than you're comfortable losing.