The first part of this article is pretty straight forward; stay away from centralized systems. Any coin that is “issued” by either a person or a company, as opposed to minted via decentralized means, is suspect. There have been a couple of coins which have tried to capitalize on Bitcoin’s success and have masked themselves to appear decentralized, Ripple is an early example of this.
The success or failure of these types of endeavors is beyond the scope of this article, but I would argue that these are not “true” cryptocurrencies, and can not be evaluated as such; a more fair way to evaluate Ripple or similar centralized ledgers, is as a startup, where it may be both innovative and successful, but it is not a “true” cryptocurrency. Any time you have to relinquish control of either your funds or identity to a third party, you are getting rid of the key advantages of Bitcoin and its successors, in exchange for, well, perhaps a flashy login page. And that’s the rub, if you don’t control the private keys, you don’t own it. If it can be taken away, frozen, or otherwise interfered with without your consent; it is not a true cryptocurrency. The upside to this is that these sorts of “fake crypto’s” are easy to identify; they will rarely have wallets in a similar vein to the Bitcoin core wallet, a standalone piece of software, but will most often be hosted on the web.
I also find distributed ledger coins, but whose coins have been created from thin air, to be suspect. These coins are distributed via giveaways and other methods, and they suffer from the same weaknesses as do centralized ledgers, they lack the intrinsic value of minting. Minting a Bitcoin costs time, knowhow, equipment, and electricity; as opposed to the conjuring of coins which costs nothing. Stay away from centralized systems.
A premine is where a coins lead developer (and others) mine the genesis block and subsequent blocks in secret for a period of time, prior to publicly launching their new cryptocurrency. These are almost always scams and one should stay away from such coins. Identifying them can be tricky at first, but they are usually unmasked within a couple of days. These coins are usually part of a pump and dump scheme, where a coin that just launched is quickly added to an exchange, hyped and pumped to a certain level and then all the premined coins are dumped, leaving bagholders with worthless crypto. This is one of the core reasons why, contrary to popular wisdom of “get in early,” I advocate not investing in a new crypto currency at least for the first 180 days of its life cycle. Yes, there are great advantages to getting into the next great thing early, mainly cheap coins, but these sorts of scams are common enough that in the long run you are better off waiting to see if a coin grabs a foothold on land before sending your hard earned money in after it.
The instamine follows a similar logic as the premine, it refers to a person or group, who, by the time the coin is publicly released, have knowingly or unknowingly introduced a flaw in the code that will allow them to mine a large number of coins (sometimes as much as 35%) in a matter of hours or days. It is important to note that the cabal that introduced the flaw is not the only one which can mine by abusing this flaw, but rather anyone can, as by definition the instamine happens after release. The end result is the same however, people “in the know” tend to profit. When a cryptocurrency is instamined, and it shows the progression of the instamine during the first few hours of the coins existence; notice how distribution is low until it skyrockets, almost vertically.
An interesting question comes up here. So if it is not okay to premine a coin, and it is not okay to instamine it, how can a developer rightly profit from his efforts? The developer is in a prime position, he knows things you do not, at least at the outset. He knows what his skills are, he knows how much time and money he has to deploy on this new project, and he knows what his endgame is. The endgame will range from “make money fast and get out,” to “change the world with my wonderful new crypto,” so he can do exactly what I just advised you not to do, that is, buy early.
There is a subset of miners that dedicate themselves to mining new coins, and they are known for quickly dumping them on any exchange that will take them; in addition to trading them via PM (private message) and forum posts. This is one way developers can get their hands on their own coins, to buy them cheap from miners (as well as mine them themselves), during the first few days and weeks after launch.
As a matter of fact, if you see a developer buying a large number of newly minted coins, this is a good sign that you might want to keep this crypto in your radar. A developer with “skin in the game” is always best. It is important to stay away from both instamined and premined coins; they are highly suggestive of pump and dump schemes.