Bitcoin and Cryptocurrency Technologies

Attracting miners has special importance for cryptocurrencies because without adequate hash power
behind an altcoin, security may fail badly if double‐spending and forks are possible. In fact, your
altcoin might be run over entirely; we’ll look at “altcoin infanticide” later in this chapter. There isn’t a
simple recipe for bootstrapping adoption, but in general miners will come once they believe the
coinbase rewards they receive will be worth the effort. To encourage this, many altcoins give early
miners greater rewards. Bitcoin, of course, pioneered this approach but some altcoins have taken a
more aggressive approach to rewarding early miners.
Getting a community of people to believe the altcoin is valuable is the most difficult trick. As we
discussed in Chapter 7, even for Bitcoin it’s not clear exactly how this process was bootstrapped as it
relies on the Tinkerbell effect. This ties back to why altcoins need a good narrative: to get off the
ground community of people need to believe that the new altcoin is really going to be valuable in the
future (and believe that others will believe it is valuable, and so on).
Given a community of people interested in obtaining an altcoin, miners will typically come (although it
might be risky if the value increases more quickly than miners can switch to begin mining the
currency). Other important elements will usually follow in turn once value is perceived‐like getting
your altcoin listed on exchanges and developing various types of supporting infrastructure are useful,
ranging from an advocacy foundation to tools for exploring the block chain
Pump‐and‐dump scams.​When the creators of an altcoin have succeed in bootstrapping a community
and a real exchange market, they have often found themselves very wealthy. That’s because they
almost certainly own a large quantity of coins — for example by being early miners before the hash
rate increases, or even “pre‐mining,” which we discuss below. Once the altcoin’s exchange rate rises,
the founders will be in a position to sell off their coins if they choose to.
The possibility of getting rich has attracted entrepreneurial individuals and venture capital to altcoins,
and unsurprisingly, it has also attracted scammers. Indeed, the line between the two is sometimes a
bit blurry. A scammer might use a variety of methods to exaggerate an altcoin’s potential and drum
up interest. They may hype up its supposed technical merits, fake the appearance of grassroots
support, purchase the altcoin on the market at inflated prices, and so on.
In fact, this scam can be pulled off even by someone who is not the founder of an altcoin. They would
first need to buy up shares of some obscure altcoin, then convince the public of this coin’s supposed
undiscovered potential (i.e., “pump” the altcoin). If they succeed in inflating the price this way, they
can unload their shares and reap a profit (i.e., “dump” their coins). At this point investors will
probably become wise to the fraud and the price will plummet, with many people left holding
worthless coins. This kind of pump‐and‐dump fraud has long been perpetrated in mainstream finance,
using obscure, low‐priced stocks, and it was common in the early days of altcoins as enthusiasm was
high and investors struggled to differentiate truly innovative altcoins from “me‐too” systems with slick
marketing but no real innovation. As a result, users and investors are somewhat weary of altcoins
today.
267