DEFINITION of 'Shitcoin'

Shitcoin is a pejorative term used to describe an altcoin that has become worthless. Shitcoin value may disappear because interest failed to materialize, because the altcoin itself was not created in good faith, or because the price was based on speculation.

BREAKING DOWN 'Shitcoin'

Interest in cryptocurrencies has increased substantially since the introduction of bitcoin in 2009. Bitcoin’s success has drawn in businesses looking to utilize the blockchain technology to create their own altcoins, which are digital assets that piggyback off the basic design of bitcoin.

Because cryptocurrencies have created a new market that investors may struggle to draw historical parallels with, 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.

Shitcoins are often identified by a specific pattern that they follow. First, the coin launches to some interest, but the price remains relatively level. Then, the price increases exponentially over a short period of time as investors pour in. This is followed by a nosedive, as investors dump their coins to capitalize on short-term gains.

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 GDP growth, debt levels, or inflation to determine whether an altcoin is undervalued or overvalued.

While developed by a company, altcoins are independent of the company’s revenue and sales. Identifying potential shitcoins thus becomes an exercise in estimating whether an altcoin’s price is driven primarily by speculation, as the price of tulip bulbs were during the 17th century's Tulip Mania, or whether there is a viable underlying market for the altcoin.

Altcoin developers typically announce the total number of tokens that will ultimately be made available. The supply of bitcoin is capped at 21 million, while the supply of ether is capped at 18 million per year. Setting a supply limit creates scarcity, as token holders would know that additional tokens will not be created after a certain point, which would theoretically dilute the value of their holdings (much like new stock issuance could 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 common – their values are based on pure speculation. A shitcoin is thus something that people say is valuable simply because it exists.

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.

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 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.

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