Fool me once shame on you. Fool me twice shame on me.Everyone has made mistakes, and more likely than not you’ve at some point bought a shitcoin. And yes, before you ask, that includes the author as well. There is nothing wrong with this as long as you are aware that what you are buying is a shitcoin; and that you don’t do it multiple times. More importantly, that you also don’t end up holding one for a prolonged period of time.
Gone are the days of projects trying to release with no whitepaper, or outlandish claims of being the ‘new bitcoin’. This is a testament to the education of retail traders and crypto market participants, who to their credit are becoming more educated and discerning. Outright scams such as bitconnect and onecoin no longer work. One will notice that both these projects were based on just promises, with nothing tangible being delivered. The education of the crypto community has now led to two types of shitcoin existing. The majority of shitcoins fall under what I refer to as shitcoins v2.0 and can be identified by certain key features. The second and rarer category, is referred to as inadvertent or accidental shitcoins.
Disclaimer: NOT FINANCIAL NOR INVESTMENT ADVICE. Only you are responsible for any capital-related decisions you make and only you are accountable for the results.
Shitcoins v2.0
Shitcoins have now developed to the point where a coherent whitepaper is usually published. In some cases a medium article which outlines the goals of the project in general is used. Such a document portrays the protocol as feasible with a straightforward plan and thus is believable. The developers, by copying and pasting existing code from other legitimate protocols, will create a token and set up liquidity pools. This gives the user the impression that real tangible progress has been made. These tactics look to prey on the psychology and fear of missing out a lot of people have. They make the investor think:“Not only have I seen a whitepaper, but there’s a token already and also a liquidity pool for me to participate in and get yield. I better get in quick before prices shoot up. They’re building really quickly!!”
This then leads us to identify other tactics used by such projects to prey on investors.
Shitcoin Tactics 101
Marketing is no longer over the top. It is more subtle and convincing of a projects’ legitimacy, with fewer outlandish claims. Influencers are being brought on board and marketing spans multiple social media channels. In some cases these projects spend the majority of their seed capital on marketing, and not development. Marketers / Influencers are paid in tokens, which is a classic conflict of interest. You should be suspect of the ethics and motivations of such people, especially if they are not transparent about their position. Failure to disclose such a straightforward conflict of interest is inexcusable.The reason behind this is that there is no actual plan for a useful protocol/token. Thus, the projects and associated marketers who have a large amount of ‘worthless’ tokens and know them to be worthless, look to increase their user base to allow for liquidity for them to sell their tokens. In other cases, which are usually referred to as rugpulls, the developers simply steal the liquidity provided by their users - just a more "modern" way to pull and exit scam or pump & dump. The developers will take control of the liquidity pool and withdraw the users’ funds to their own wallets for their own financial gain. More users leads to more potential profit for such projects, which are effectively crypto fraud. Some more sophisticated shitcoins are simply a ponzi scheme written into a smart contract. Does having people pay a percentage of their buy in to other holders, and also having to pay another fee when selling, sound familiar?
As outlined above, the steps to create a shitcoin are quite straightforward. The avenues for the creators of shitcoins to exact personal financial gain from naive investors are numerous. This requires the investor to always be wary and do their due diligence on any project.
The Inaverdent or Accidental Shitcoin
Spotting such coins is harder and the indicators are quite nuanced. These types of shitcoins are protocols which actually have some sort of functionality, but there is no need for a token. A user interface offers actual value, but there is no basis or need for a token. In most cases, the release of such tokens is done to raise funds for the developers.Another advantage that shitcoins without a use case have is that implementing whatever protocol idea they have come up with is usually simpler than implementing an actual value adding protocol. Making a token, distributing and listing it are simple and straightforward for a team that has already built something, and allows them to capitalise on their work. There are of course exceptions to this, and a well reasoned explanation behind the rational of every decision made is acceptable. There are always two sides to a coin and a viewpoint, and all possible angles should be considered fairly.
For example, if the protocol wishes to decentralise its’ decision making a token can be issued. Such tokens are governance tokens and do not infer any kind of revenue or use case past input into the direction of a project. At such early stages of development, it does not make sense for developers to relinquish control of the protocol to the community as the protocol is not established yet. Such decision making tokens which receive no revenue, are fundamentally not speculative or investment material. However, we also have to keep in mind that if the governance token belongs to a protocol that does generate revenue then it's probable that over time the token holders will vote "revenue sharing amongst token holders" into existence.
With the creation of a token which is not clearly defined to be solely for governance, allocations play an important role. Allocations are determined by the developer team and are a great indicator of the teams’ commitment and business practices. The method that tokens are distributed is a hotly debated topic. We have seen projects airdrop tokens to wallet addresses that have interacted with their protocols with no advance notice, to ensure that people do not take advantage of this method of distribution. Other times allocations are also being sold to venture capital (VC) funds at extremely advantageous prices.
One strategy that has been adopted by projects is having such allocations (advisors/seed funding from VCs, strategic partners) locked for a certain amount of time, which is referred to as "vested tokens". Another option is that the allocations are gradually released to the parties. The aim of such unlocks is to ensure that developer and holder interests are aligned for the foreseeable future by somewhat forcing them to hold and/or avoiding sudden supply shocks by removing that option from the get-go. The goal is to benefit everyone in the long run, with tokens appreciating in price. In reality, some projects change the timelines for unlocks at their own discretion and at the cost of their community holders. This allows for the VCs and developers to unload the token as they know that the protocol has reached maturation and is now a shitcoin. The developers themselves will simply sell their allocation after changing their permissions. Such sell volume leads to the price depreciating, but as the developer is effectively looking to exit the project they do not care. In other cases, there does not need to be malicious action to cause price depreciation. The market simply reflects the reality of the token having no intrinsic value/use, as more participants understand this once hype fades and fundamental flaws are made clear.
Other avenues of failure exist, and due to bugs or errors a protocol can be exploited and funds withdrawn. It is expected that every protocol can fall victim to an exploit. However, the longer a protocol has been in use without a security issue, the more likely it is that one will not be found. For example, after so many years, it is quite clear that the Bitcoin and Ethereum networks are censorship resistant due to their degree of decentralisation and network which has been stress tested multiple times. No one has been able to successfully ‘double spend’ or ‘forge’ a bitcoin. The likelihood of this being possible decreases the longer it does not happen. This is why protocols that are exploited are usually relatively new and still in development. In some exploit cases, it is not clear if the developers themselves have exploited the protocol, or if it is attackers who have done so. This leads to distrust between the ecosystem participants.
Summary & Further steps
- Does the project have an actual product?
- Is the existence of the token necessary?
- Does the tokens allocation plan and schedule favour long-term growth?
- Does it seem like excessive capital is being spent on marketing rather than development?
You will need to vet the development team. Are the devs anonymous and what is their previous experience/work? Do they have a proven track record of development? Is what they propose in their whitepaper feasible for their capabilities? What is the to date progress on the protocol and has it followed a reasonable timeline?
We also need to check the users. Is the projects’ user base growing regularly? What does ecosystem activity look like? Can the protocol scale? How does the community feel about the project? Is the protocol interacting with other legitimate projects in the space? Is their token listed on reputable exchanges? Are there any other external factors you should be aware of?
There are more factors that determine the legitimacy and future success of a project. In many cases these factors are linked with each other and require careful consideration and analysis. Correct interpretation of all the available information and facts should ensure that you never get fooled twice by shitcoins.
The best filter? Common sense.
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