Shitcoins: What They Are, How To Identify And Avoid These Pitfalls

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Shitcoins: Since its last big drop, in March of last year, Bitcoin (BTC) has appreciated by a total of 1,670%. Other alternative cryptocurrencies, known as altcoins, followed the upward movement with great asymmetry, as is the case of Ethereum (ETH) and Cardano (ADA), which had jumps in their prices of 5,200% and 17,000%, respectively, in the same period .

In contrast, for example, it is possible to mention the movement of “only” 67% of the Ibovespa index (IBOV), which brings together the main stocks in the Brazilian market.

Naturally, the explosive appreciation of cryptocurrencies has caught the attention of investors around the world and has become something of a “fever” in recent months. In Brazil, as shown by data from the North American brokerage firm Passfolio, there was an increase of 1.082% in investments in this market between October 2020 and September 2021 alone.

The dangers of a growing market
But the promising profit margins of major cryptocurrencies such as Bitcoin and Ethereum don’t seem to be enough for some investors. It is in this context that “shitcoins” were born, a term that can be loosely translated as “junk coins”, referring to projects that promise large profit margins, but do not offer the necessary foundations for such.

A shitcoin is not always easily identifiable and, in some cases, it may even have an efficient marketing team that is able to attract investors in large numbers. However, one of the main incentives for the adoption of these currencies is the extremely low trading price, suggesting the idea of ​​a false potential for explosive growth, as occurs in well-founded assets. So how to “separate the wheat from the chaff”?

How to identify and avoid a shitcoin

1. Search for official project documents

To assess the integrity and provenance of a cryptocurrency, simply look for its official documentation, also known as a whitepaper. Traditionally, the technology behind these digital assets has sought to provide a service or function to investors in a secure, transparent, and reliable way — so it is natural that these characteristics are reflected throughout their base text.

Unlike well-founded coins, shitcoin documentation can be vague, inconsistent, entirely copied, and even have gross typos, revealing little care on the part of developers.

You can usually find this documentation directly on the project’s website or on the CoinMarketCap website, which aggregates key information from most cryptocurrencies on the market.

2. Meet the developer team

As in the traditional market with companies, investors must know those responsible for the projects they participate. The anonymity of a development team is often a negative sign when it comes to trust, especially for small cryptocurrencies.

Thus, the appearance in public of project representatives usually promotes more security for investors, with good communication between both parties. A good example of this is Cardano (ADA), internationally represented by its charismatic founder, Charles Hoskinson.