What it means
Thousands of digital tokens exist, and a large number of them have no working product, no revenue and no clear reason to exist. They can be created in minutes at almost no cost, and promoters may then market them through social media and influencers.
The term is crude, but it is widely used, and it does flag a real category of risk. Common warning signs include anonymous creators, vague plans, no working product, and a large share of the supply held by a few wallets.
Others include promises of guaranteed returns, aggressive promotion and prices that rise sharply with no news. Some tokens are pushed up so that insiders can sell to latecomers, which is known as a pump and dump.
For corporate finance teams, the relevance is practical. A company that accepts crypto payments, holds digital assets on its balance sheet or advises clients needs a policy for which tokens it will touch and how it values them.
Holding poorly traded tokens creates liquidity risk, and small trading volumes mean the quoted price may not be what could be realised on a sale. There are also legal and tax points.
Regulators in many countries have taken action against fraudulent token promotions, and some tokens may be treated as securities. Tax treatment of gains and losses depends on the jurisdiction, so records of purchases and sales are essential.
The nuance is that the label is subjective. A token that one person dismisses as worthless may have a genuine community and use, and a once-respected project can drift into the category if it loses its purpose.
Careful analysis of what a token does, who controls it and how easily it can be traded is better than relying on a label.
In practice
Real-world examples.
Example
A retail investor sees a token trending on social media after a celebrity mentions it. She checks the project's website and finds no product, no named team and a large share of the tokens held by one wallet, and decides not to invest.
Example
A company treasury policy states that the business may only hold digital assets that rank among the largest by trading volume and are traded on regulated platforms. The policy excludes thinly traded tokens in order to avoid liquidity and valuation problems.
Example
A compliance officer at a payments firm reviews a customer's transactions and notices a series of large purchases of obscure tokens followed by rapid transfers. She files a report for further review, because the pattern is consistent with a pump and dump scheme.
Formula
Calculation
Market capitalisation = circulating supply x price
Fully diluted valuation = total supply x price
Suppose a token has a total supply of 10,000,000,000, of which 1,000,000,000 is in circulation, and trades at $0.02. The market capitalisation is 1,000,000,000 x 0.02 = $20,000,000. The fully diluted valuation is 10,000,000,000 x 0.02 = $200,000,000. The gap shows that nine tenths of the supply is still to be released, and if those tokens were sold into the market, the price would face heavy selling pressure.Case study
Seen in the real world.
Moonwave Token is an illustrative, fictional digital token launched by anonymous creators who promised huge returns and a future payments app. Within a week of launch, its price rose by 40 times, driven by social media posts.
The creators held 60% of the supply. When the price peaked, they sold a large portion, and the price fell 95% within two days, leaving late buyers with heavy losses.
A small business that had bought $10,000 of the tokens near the top saw its holding fall to about $500. The illustrative lesson was that concentrated ownership, anonymity and unrealistic promises are strong warning signs, and that a high price on a thinly traded token does not mean the holder can sell at that price.
Watch out
Common mistakes.
- Judging a token by recent price gains, when rapid rises can reflect hype or manipulation.
- Ignoring who holds the supply, when a few wallets controlling most tokens can crash the price by selling.
- Assuming that a token listed on an exchange is vetted and safe, when listing standards vary widely.
Questions
People also ask.
Is every low-priced token a shitcoin?
No, price alone says little, since a token with a low price per unit can still have a real purpose, while some high-priced tokens are worthless.
How can I check whether a token is risky?
Look at who is behind it, whether it has a working product, how the supply is distributed, how much it trades each day and what independent reviewers say.
Why would a business care about shitcoins?
It may face risks if it accepts such tokens as payment, holds them in treasury, or has customers who lose money on them.
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