Interest in cryptocurrencies has increased significantly since the introduction of Bitcoin in 2009. Their success has led businesses seeking to use blockchain technology to create their own altcoins—those digital assets that utilize Bitcoin's original design—to do so. Developers typically announce the number of tokens that will eventually be available, and as a result, Bitcoin's supply is limited to 21 million, while Ether's supply cap is 18 million.

Setting a supply limit creates scarcity, as investors know that additional tokens will not be created beyond a certain point. More tokens theoretically decrease the value of the assets, just as the issuance of new shares can dilute the value of a stock.

With a fixed supply, the value of an altcoin should depend on demand. However, since most base cryptocurrencies have limited practical utility—meaning that buying and selling real goods and services using digital currencies is not yet a common occurrence—their value is based on pure speculation. Therefore, a shitcoin is something people say is valuable simply because it exists.

 A notable point is that cryptocurrencies have limited practical utility and their value is based purely on speculation.

Identifying shitcoins is easy because they follow a specific pattern. While there may be particular interest in a coin during its launch, its price remains relatively stable. But the price increases exponentially over a short period of time as investors begin to invest. Following this, investors who pour their coins into investing for short-term profits will follow suit.

It is unlikely that the development and marketing of altcoins that are eventually considered shitcoins will slow down significantly, as interest in cryptocurrencies remains high. Some governments, especially those in South Korea and China, have a strong interest in stopping cryptocurrency mining operations, while others, such as Japan, have encouraged wider use of cryptocurrencies in the market.

Notable Points

Due to the cryptocurrency market, where 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 plenty of room for exploitation. Distinguishing whether a cryptocurrency is sustainable or was created merely to attract investors can be difficult.

Assessing why an altcoin is valued at a certain price requires a different approach than pricing 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.

In addition to the confusion over whether an altcoin is truly valuable or not, most information regarding altcoins is found on the internet, where distinguishing accurate information is difficult and most of it is created solely to generate hype.

The most famous example of a shitcoin is Dogecoin. Dogecoin branched off from Litecoin in 2013 to be considered an entertainment currency. This shitcoin was created as a meme coin, and its appeal was limited to the Shiba Inu dog breed shown in its logo.

Shitcoins derive their value solely from their existence. After launch, speculation regarding their creation leads to a rush of investors who have capital. Mass buying drives the price of these coins up exponentially in a short period.

When these investors cash out to realize short-term profits, their prices drop as quickly as they had risen. Once all immediate profits are realized, the price of the shitcoins remains at the same level without much movement. This draining trend often leaves novice investors facing a volume of worthless shitcoins.

For example, Dogecoin derives its value from the tweets of the wealthiest individual on Earth, Elon Musk. Without his support and his shared opinions, the coin's value would be based on nothing. Furthermore, the CEO of Tesla has also announced that the company is accepting Dogecoin payments on a trial basis.

Despite developers' efforts to hide them, shitcoins display several prominent red flags. Here are a few points:

Developers: Cryptocurrency developers, if they are visible to the public, gain enough trust from the masses and lend legitimacy to the newly launched cryptocurrency. Faceless developers are inherently suspicious and are more likely to be scamming the public.

Undefined Function: Blockchains like Bitcoin and Ethereum are designed to improve decentralized finance (DeFi) by removing a central authority and increasing transaction security. Therefore, BTC and ETH are stores of value due to the utility they provide. Shitcoins have no such fundamental purpose and simply exist.

Public Projects: If a project makes grand promises but has no clear function, it is likely a shitcoin. Such project websites are often hosted on free domains, riddled with spelling errors, and even poorly designed.

Few Holders: The norm suggests that a legitimate cryptocurrency should have at least 200 to 300 coin holders. Any number below this range indicates suspicious activity. A healthy coin worth investing in should also show 5 to 10 transactions per minute.

Dry Liquidity Pool: A newly launched decentralized exchange relies heavily on available cash funds. Liquidity below $30,000 is a red flag to avoid. The coin might even be listed with surreal discounts of up to 30%, which is not sustainable.