DEFINITION of Premining
Premining is the mining or creation of a number of crypto coins before the cryptocurrency is launched to the public. Premining sometimes has a negative connotation in the cryptoworld due to the ability of private developers to privately mine and allocate a number coins to themselves before releasing the open source code of the currency to the public. This could lead to a feeling of lack of transparency in the digital currency offered to the public. However, it is important to note that not all premining is for fraudulent purposes.
Premining should not be confused with Premine, an alternate cryptocurrency with the currency symbol PMC.
BREAKING DOWN Premining
There are a number of reasons why a cryptocurrency could go through a premining phase. Premining could occur due to unscrupulous and unfair practices of the developers or the cryptocurrency market exchange platform. A coin could also be premined for further development of the coin. Finally, coins that have an initial coin offering (ICO) are premined for pre-sale to its investors and supporters.
Lots of new cryptocurrencies offered to the public have been premined for unscrupulous reasons. The developers of these crypto scams will usually mine a huge number of the coins before launching it to the public. By hyping and pumping the coin as the new ‘it’ coin, crypto users are likely to create a high demand for the currency which inflates its price. Once the price has been hiked, the original developers sell off and dump the coins in the market, following the classic pump and dump scheme prevalent in the OTC stock market. Of course, once the coins are dumped, the price plummets, causing financial loss to the avid users or speculators. Users are always cautioned against new cryptocurrencies since these digital tools are in effect, speculative trading tools.
The exchange platforms where digital currencies trade could also engage in unfair listing practices. Some exchanges demand that before a cryptocurrency is listed, the developers give them some of the coins as payment. These exchange regulators are corrupt in the sense that they don’t really care about the technological capability of the cryptocurrency or whether it is a currency created for legitimate purposes; their only interest seems to be in the quick buck that can be gotten if the price increases after it is listed on the exchange. In a case where the exchange demands payment before listing, the coins will have to be premined.
Premining is not necessarily a bad endeavor. It could be seen as a way to reward the developers who were part of the cryptocurrency creation. Advocates for premines argue that without such rewards in place, there will be no incentive for developers and early miners to build these cryptocurruncies and mining networks which are arguably dominating the digital era and dark web. Cryptocurrency developers also use premined coins as payments to other developers and programming experts to further develop the coins for efficiency, effectiveness, anonymity, etc. for users. Think of it in the same way as a startup company rewarding its early workers with stocks instead of cash, in the hopes that the company would grow to a stage where the stock value eventually goes up.
Another legitimate reason for premining coins is found when a new crypto project plans to launch an Initial Coin Offering (ICO). Just as a stock’s initial public offering (IPO) includes some pre-sale to affluent investors and institutions who get dibs on investing in the stock, early investors of a cryptocurrency receive a number of premined coins according to what each individual or group contributed to the ICO project. When a crypto startup decides to go public, it raises the needed funds from enthusiasts who back the firm’s initiatives by purchasing some of the premined coins for money. After it goes public, the early backers can sell the coins for a sizeable profit if the coin’s price goes up in the market. Ethereum (ETH) is one of the noteworthy cryptocurrencies that premined a large amount of coins before going public through its ICO, and as of May 2017 is trailing Bitcoin as the second largest cryptocurrency by market capitalization.
Note that premining is different from instamine ,but both are incorrectly used interchangeably. Instamine (or fastmine) occurs when blocks of the cryptocurrency are released to the public but are mined at an unintended faster rate by just a few miners within the first couple of hours or days of launching. A cryptocurrency that has been released and that has been premined or instamined should be scrutinized carefully by an investor before getting on the bandwagon to ensure that the developers behind the coin are in it for the long-term as an alternative currency for use in online marketplaces.