Premining, observed in some companies within the crypto space, refers to the practice of mining a specific number of cryptocurrency coins before the public launch of the company’s blockchain.
Bitcoin, unlike many others, did not undergo premining. Its total supply of 21 million bitcoins is gradually released over time through a mining process that will continue until the year 2140.
In premining, coins are created and reserved for the developers and potentially presold to investors in exchange for seed funds. This allocation serves various purposes, including funding further development of the coin. While selling portions of premined coins to investors for development is a fair approach, some premining may occur as a result of unfair practices by developers primarily focused on monetary gain rather than project development.
For seasoned investors, premining can be compared to offering equity stakes in a startup before its Initial Public Offering (IPO). Ideally, the coins allocated and sold to early investors will increase in value once they become tradable.
Unfortunately, during the ICO era from 2017 to 2018, many private developers engaged in premining without releasing the open-source code, creating distrust among cryptocurrency investors. The lack of transparency regarding the number of coins already sold and concerns about potential market dumping led to inflated prices before ICOs, followed by a subsequent decline in value when insiders sold their coins amidst market hype. This influx of supply caused financial losses for those who were not part of the initial sale.
However, premining has its advantages. Developers holding premined coins have less incentive to abandon a project and create new cryptocurrencies, promoting project continuity. Additionally, premined coins can be utilized by cryptocurrency developers as a form of equity to compensate other developers for further coin development.
Considering this information, it is crucial to thoroughly scrutinize coins that have undergone premining before making investments. This helps ensure that the developers behind the coin have genuine intentions and are committed to the project’s long-term success rather than solely aiming to raise funds and subsequently disappear or neglect the project.