Premine

A portion of the total supply of a cryptocurrency reserved for its founders. These funds are often marked as funds to pay developers or fund future ventures, but cryptocurencies with premines are generally viewed as less legitimate and fair those without premines.

You may have noticed that some companies in the crypto space engage in premining -- which is the mining of a number of cryptocurrency coins before the company’s blockchain is launched to the public.

Bitcoin did not engage in any premining. Bitcoin will have a total supply of 21 million bitcoins and they are estimated to be slowly released every ten minutes until the year 2140 -- so long after we’re all gone. 

But premining refers to the process of creating coins and then reserving those coins for the developers of the coin and any investors they may have presold the coins to in exchange for seed funds. 

And those are only some of the reasons a coin might be premined.

A project may sell portions of the premined coins to investors to pay for further development of the coin. That is a fair way to go about raising funds, but some premining could occur due to unfair practices of the developers simply seeking to make money first and then skip on development. 

If you’re a seasoned investor, you can think of premining to offering equity stakes of a startup before that company's Initial Public Offering (IPO). The coins that are set and sold to these early investors will, hopefully, rise in value for their holders after those coins become tradable.

Unfortunately, during the ICO era, from 2017 to 2018, many private developers would premine for themselves before releasing the open-source code and this would lead to distrust among cryptocurrency investors who didn’t know how many coins were already sold and if the people who held them would simply dump them on the market. 

This practice would also create high demand and inflate the price of such coins before the ICOs -- catching the interest of many newbies and others in the space. After the ICOs, these insiders would sell their coins into the hype surrounding the market. This gigantic influx of supply would plummet the price and cause financial loss to people who were not part of the initial sale.

Nevertheless, premining isn’t all bad. One of the advantages of developers holding their premined coins is that there will be less incentive for developers to give up on one project and build new cryptocurrencies instead of sticking to the first one. 

Cryptocurrency developers also find benefits in premined coins because they can use these coins like stocks and pay other developers to further develop the coins.

With all of this information, check to see if any coins you’re investing in have been premined and scrutinize them carefully investing in it in order to ensure that the developers behind the coin are not just trying to raise a lot of money and then disappear or just let the project die.