Shitcoin

What Is Shitcoin?

The term shitcoin refers to a cryptocurrency with little to no value or a digital currency that has no immediate, discernible purpose. The word is a pejorative term often used to describe altcoins or cryptocurrencies that were developed after bitcoins became popular.

The diminished value of a shitcoin is often due to failed investor interest because it was not created in good faith or because its price was based on speculation. As such, these currencies are considered to be bad investments.

How Shitcoins Work

Interest in cryptocurrencies increased substantially since bitcoins were introduced in 2009. Their success has drawn in businesses looking to take advantage of blockchain technology to create their own altcoins, which are digital assets that piggyback off the basic design of bitcoin. Developers typically announce how many tokens are ultimately made available—the supply of bitcoin is capped at 21 million, while ether supplies are capped at 18 million per year.

Setting a supply limit creates scarcity, as investors understand that additional tokens will not be created after a certain point. More tokens would theoretically dilute the value of their holdings, the same way a new stock issuance may reduce the value of a share of stock.

With the supply of an altcoin fixed, its value should be dependent on demand. But since most cryptocurrencies have limited practical use—buying and selling real-world goods and services using cryptocurrencies is not yet a common occurrence—their values are based on pure speculation. Therefore, a shitcoin is something people say is valuable simply because it exists.

Shitcoins are easy to identify because they follow a specific pattern. Although there may be some interest in a coin when it launches, its price remains relatively level. But the price increases exponentially over a short period of time as investors begin to jump on board. This is followed by a nosedive caused by investors who dump their coins to capitalize on short-term gains.

It is unlikely that the development and marketing of altcoins that will one day be considered shitcoins will slow down substantially while interest in cryptocurrencies remains high. Some governments, specifically those in South Korea and China, have taken a keen interest in stamping out cryptocurrency mining operations, while others, such as Japan, have encouraged the use of cryptocurrencies in the broader market.

Special Considerations

Because of the cryptocurrency market—with which investors may struggle to draw historical parallels—and because the underlying technology used to manage blockchains may not be well-understood by a large percentage of investors, there is ample room for abuse. It can be difficult to identify whether a cryptocurrency is viable, or if it was created to bilk investors.

Evaluating why an altcoin is valued at a specific price requires a different approach than determining the price of securities or traditional currencies. Altcoins are not backed by governments, meaning investors cannot look at gross domestic product (GDP) growth, debt levels, or inflation to determine whether an altcoin is undervalued or overvalued.

Adding to the confusion of whether an altcoin is actually valuable is that most information about altcoins is found on the Internet, where it can be difficult to pin down whether the information is true or simply manufactured in order to create buzz.