If you haven’t read the last two blogs on this topic, please review those now.
What makes a junk coin and why would a developer want to make a junk coin?
Initially developers were creating new coins hoping it will be the next bitcoin, but some where along the line the thought process changed from creating something new and liberating to “how can I make a quick buck off of this?”
The idea is they generate a coin, mine it when it the release it and the difficulty is low to accumulate a ridiculous amount, then when the coin reaches any level of popularity they unload the coins they have into the market at a lower than asking price. This ensures the coins will disappear quickly and the creator has so many that they aren’t worried about asking for a slightly lower amount. Let’s create a coin; we’ll call our hypothetical coin SUPERMEGACOIN, or SMC(If there already is a SUPERMEGACOIN, you’re welcome for the free press).
Since we’re developing SMC, we set the block rewards. Block rewards are coins that are given to the miner for generating the transaction that lives in the block. We have another advantage as we get to choose when this first SMC block is mined. Let’s say we set our total coins at 100M, there will be 200K blocks in total and now we decide how much SMC each block will generate! This is where we set ourselves up for success.
We can set the rewards to be pretty much anything we want; every block could give an even amount of 500, or the first 100 blocks could give 1000 while the remainder only give 250, whatever. We decide to set the first 5 blocks to give out a RIDUCLOUS amount of coins. Let’s say 2M each. We mine them and score a cool 10M SMC. The remainder of the coins are spread out evenly at 461 SMC per block. So it will take 20000 blocks before another 10M coins are released. When this coin is added to an exchange where it can be traded for bitcoins a value is placed on it based partially on how hard the coin is to acquire, partially on what someone is willing to trade for it, and partially what someone would trade it for.
2 weeks after launch SMC is placed on the exchange, it’s valued at .00001 bitcoins per SMC(that’s about half a penny if you’re keeping track!). Seems fair since each block is worth 461 coins, that’s about .004 bitcoins per SMC block. With a block creation time of 2-3 minutes that’s a good chunk of bitcoins per day! This is the moment we’ve been waiting for, let’s dump our 10M coins into the market, selling them at .000005, half of what SMC is worth, so they trade quickly! We stand to make 500 bitcoins if we sell them all!
However, we won’t sell them all. The price will be stuck at .000005 bitcoins because it’s not worth it to trade them for less and it’s going to be a while before all 10M of our coins are traded. This kills SMC because nobody wants to mine it and nobody wants to use it because the price is fixed much lower than it should be. This causes people to unload the coins they were holding on to in hopes of it becoming more valuable, which drives the value even lower. We don’t care though; if we trade even 100K of our 10M SMCs we stand to make 5 bitcoins! Not bad for 2 or 3 days worth of programming. Now you know what a junk coin is and how it gets that status.