Money Matters: How to identify valueless cryptocurrency and dodge “shitcoins”

How to identify valueless cryptocurrency and dodge

A contextual guide to finding a needle in the haystack of shitcoins

Currently, Bitcoin, Ether, Binance Coin and Cardano rank among the top ten cryptocurrencies by market capitalization. While these cryptocurrencies have climbed the charts, not every cryptocurrency that enters the market will be the next big thing.

Ever since bitcoin arrived on the crypto market in 2009, many have tried to take advantage of blockchain technology to create their own altcoins. These ‘altcoins’, or, as they are colloquially referred to, ‘shitcoins’, are cryptocurrencies with little to no value and no discernable purpose. They are made as copies or knock-offs of the basic design behind bitcoin.

How Cryptocurrencies get their value

To identify a shitcoin, it is important to note how cryptocurrencies get their value in the first place. The developers of the cryptocurrency usually define its value by supply. This means that there is only ever going to be a specific number of coins in circulation, after which no more will be generated or mined. For instance, in the case of bitcoin (BTC), it is capped at 21 million, and for ether(ETH), it is 18 million per year.

After the supply is defined, demand is generated by means of speculation. Simply put, a cryptocurrency does not have any value to begin with. Value is created by community discussion around the currency, the currency’s pre-defined use, and investments by those who see it as commercially viable. So a currency, like ether, gets its value because users of ethereum-based platforms can only buy products and services using it.

Most shitcoins have the same trajectory. First, there is a huge hike in the coin’s value as it gains investor attention. This hike is followed by a fall in price when investors realize that the coin has no real use. Then, they dump it to capitalize on short-term gains.

An example of a hike followed by a sharp fall was the case of Bitconnect. The company first entered the crypto market in 2016. The premise behind it was that users could exchange bitcoin for bitconnect coin. The users were promised daily returns in US dollars on their investment.

However, after reaching a value of US$470 in December 2017, the currency plummeted. At the beginning of 2018, the company shut down taking with it all of the investor’s capital and was criticized as a fraudulent Ponzi Scheme.

Identifying Shitcoins

The first, and perhaps the most important, step when looking to invest in a coin is to check how new it is. This can be done using block explorers like BSCScan, which is a part of the Binance Smart Chain.

Block explorers help users look up, confirm and validate transactions. They are also useful in tracking and finding new altcoins. After locating a potential altcoin investment, the investor can look up information about that altcoin to see whether it has a website and other social media.

If the website domain of the altcoin seems generic, it might be a sign that it is a shit coin. When the content of the website’s white paper is either indistinguishable from other crypto projects or too technical to understand, these are red flags that investing in that certain altcoin is not a good idea.

Looking at an altcoin’s digital presence can help the investors identify the legitimacy of the coin. If the developers have made themselves publicly known, the coin would rarely ever be a scam. Having their identity publicly known makes them susceptible to criminal charges if they trick their investors.

Guaranteeing the safety of one’s investment

Experts suggest that a safe new coin should have about 200-300 holders. If there are only a few investors with a large number of holdings, that is a sign that the coin might be a scam.

Healthy coins should have a fair few transactions every minute. This means that cryptocurrency should change hands frequently. Another way to gauge the health of a coin is market capitalization. Market capitalization refers to the product of the number of coins in circulation and the current price per coin.

Market capitalization is the total dollar value of all the coins of a particular cryptocurrency that have been mined. A low market capitalization means that a cryptocurrency is subject to high price fluctuations. This makes coins with low market capitalization a risky investment.

These factors are an effective way to ascertain the legitimacy of a cryptocurrency. However, it is still very important to study market trends, analyze the currency’s stability and also keep one’s own financial situation in mind when making investment decisions.

Finally, when it comes to keeping one’s investment safe, a sensible choice is to start small. A small investment will help you study the altcoin market to know whether it is a viable investment. Keeping your investment values low will help you pull out of the coin in case its value starts to drop without losing too much in the process.

Image courtesy of Unsplash

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Kamya Pandey

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