#5. The Speculator’s Guide To Masternodes and Masternode Network Value

Given the fervour that began with DASH announcing the release of its initial masternode system and that continues to surround the plethora of projects now offering their own versions of one, what exactly is the incentive for a speculator to run a masternode, and how can one navigate the oversaturated space to find the most promising opportunities? One brief glance at a masternode directory, such as www.masternodes.online, will suffice to show just how daunting a task this can seem to those unfamiliar with the territory; with well over 300 masternode coins listed on that website alone, what should you really be looking for?

Masternode Network Value (MNV), as I like to call it, is the calculation that I consider the key to unlocking the most dependable opportunities in the masternode space. Note that I do not say ‘most profitable’, but rather ‘most dependable’. There is a critical difference between the two, but we will get into that a little later. By the end of this post, you will have a comprehensive take on my approach to masternodes: how I research and analyse them; the distinction between profitability and dependability; why I believe that MNV is the most informative calculation one can make regarding masternode speculation; and how the common pitfalls can be avoided.

But first, we must first define what a masternode is and why they can be a profitable addition to an altcoin portfolio. Forgive me if I butcher the definition, though I write from the perspective of a speculator, and, as such, much of the (irrelevant) technical information has been omitted:

A masternode is simply collateral, in the form of a predetermined amount of a given coin, that fulfils certain tasks on the blockchain and is rewarded for these tasks, often with a fixed portion of the block reward.

Thus, running a masternode is financially incentivised, and one can begin to accrue a steady passive income given an appropriate strategy. Needless to say, it is a space rife with opportunity but also pitfalls, and rarely is it ever as easy as simply selecting a masternode coin, buying the collateral and watching the income pour in. I first began to utilise masternodes in my own altcoin portfolio around twelve months ago, being aware of the potential rewards but anxious about the technology and all that goes with it prior to that. Since then, they have become integral to my strategy, and some of the greatest returns-on-investment that I have gained have stemmed from such projects.

Without further ado, let’s get stuck in.

Tools and Resources:

To begin with, we need to identify the tools and resources available to us to search out – with some luck – promising masternode projects. As far as I am aware, there are five useful masternode directories or ranking websites:

These should suffice for the research process, though I often also scour the Bitcointalk threads – using a simple search for ‘masternode’ – to bolster the list of potentials.

Masternode Network Value:

Now, we must define what I deem to be the most important calculation (for a speculator) concerning masternodes: Masternode Network Value, or MNV. Masternode Network Value is as follows:

(cost of one masternode x number of masternodes online) / circulating market cap

To clarify, let’s take DASH as an example. The MNV of DASH would be:

(39.04BTC x 4656) / 318,233BTC = 0.571 or 57.1%

For comparison, let’s take MANO as an example. The MNV of MANO would be:

(1.8BTC x 186) / 937BTC = 0.357 or 35.7%

And finally, let’s take MEDIC as an example. The MNV of MEDIC would be:

(2.31BTC x 144) / 2202BTC = 0.151 or 15.1%

This is essentially just an equivalent calculation to that of the Coins Locked figure that can be found on some masternode directories, which shows the supply that is currently locked in masternodes as a percentage of the circulating supply, except that I prefer working it out as an MNV figure because I get to know the strength of the underlying masternode network. This leads us on to the next question; what exactly am I looking at with this calculation, and why is it helpful?

MNV is a figure that shows you how much of the market cap of any given masternode coin has actually been bought up and locked into running masternodes. Therein lies its utility; market caps can be useless, artificial figures, but MNV cannot feasibly be faked. It is indicative of true demand and value for a masternode project, as it illuminates the amount of buying that has taken place to accrue those masternodes. The first part of the calculation is itself the masternode network value, as it is a sum of the cost of all masternodes currently online, and we use the circulating market cap to assess how much of a coin’s perceived value is actually in use. It’s all well and good having a billion-dollar market cap for a masternode coin, but if only 10% of that is in operation – running masternodes – it speaks volumes as to the dependability of that masternode network.

With regards to how this calculation becomes useful in our analysis, it differs based on the following section.

Masternode Selection:

The selection process from this point is dependent upon one’s aim; is it to find the most profitable masternodes or the most dependable? As I mentioned prior, there is a critical difference here, and this is where Masternode Network Value comes in. Before elaborating on the most dependable, I’ll first run through the most profitable.

I must preface this by mentioning the more imminent danger to high-profitability: inflation. With a swift glance at the masternode directories I have provided, you will see an abundance of coins seemingly offering upwards of 1000% annual ROI, and at least a handful offering upwards of ten times this. This is a death trap. Do not fall for the false glisten of such rewards; with immense profitability comes immense inflation. The cause of such rewards is as follows, and it is simply a marketing trick:

The Masternode Trick:

Project Z announces its launch and states that its masternodes will be providing 1000% annual ROI by offering the vast majority of their block rewards to masternode holders → This attracts a large number of speculators and miners → The collateral requirement is high and the project has a premine that allows for a handful of masternodes to be set up by the developers to ‘get the masternode network running and stable’ → The developers use part of the premine as a listing fee to index their projects on the popular masternode directories → Meanwhile, the early masternodes are reaping far greater than the specified 1000% annual ROI as there are so few up and running, so block rewards are disproportionately being accrued to those early few → The masternode directories now show the project to currently offer far greater than 1000% annual ROI, which in turn attracts more speculators and miners → This creates artificial demand for the coin, as the collateral amount is often so excessive that it is impractical to simply mine the amount in short enough a time-period to reap the current rewards → The early masternode holders can sell their rewards because of such high demand → More and more masternodes come online and the annual ROI greatly decreases to accommodate this but supply emission does not change as the block rewards remain the same → The price of the coin decreases as demand is no longer sufficient to maintain the supply emission, to the woe of anyone who bought their masternode collateral after the early few.

This may be a simple trick, but it has been used and re-used by so many projects that there is now a graveyard of tens, if not hundreds, of coins that will never recover. The allure of high profitability is too great for the trick to stop working. It is partly the reason for my hack, back in October 2017, as I was scouring the crevices of the cryptosphere for early entry into the most profitable masternodes; thereby unwittingly downloading an unsafe wallet with a hidden RAT that later devoured the majority of my altcoin portfolio. There can only be a few winners (at least at the highest levels of profitability) for such coins, and these are all too often the developers and the very earliest (and luckiest) miners. I myself was lucky enough to be perhaps one of the first five miners on Magnet, securing myself three or four of the first twenty or so masternodes, and, as such, reaping since-unparalleled profitability. But this is a rarity and not one I suggest seeking out. (Saying that, I may find someone with more experience in speculative mining to write a guest post on this, at some point.)

The Process (High-Profitability Masternodes):

For the inconvincibles, there is still a process for picking profitable masternodes that won’t have you weeping after a week:

  • All of the selection criteria highlighted in the book and in my post on Picking Out Microcaps remains valid, and should be the first port-of-call for separating the wheat from the chaff.
  • After that, ignore any masternode offering over 1000% annual ROI. This is too great a level of inflation for it to be worth the additional stress.
  • It is at this point that MNV comes into play. For higher profitability masternodes, you want a higher-than-usual MNV. This is because higher profitability means greater supply emission, thus likely devaluing the coin and thereby our masternodes. High MNV assures that a high percentage of the coin supply is locked up in masternodes. (Note: this figure is dynamic rather than static. We must monitor it closely to assure there is a constant demand for masternodes on this network.)
  • For masternodes with greater than 100% and less than 1000% annual ROI (the range I consider ‘high profitability’), I would suggest filtering for at least a 0.66 or higher MNV (66%). Two-thirds or more of the market cap in operation to run masternodes is rare but I believe it is a necessary filter to prevent falling into the liquidity trap, wherein demand for masternodes is too low to accommodate the immense supply emission.
  • From here, the usual technical analysis comes into play, where I make sure that the chart aligns well with MNV. What I mean by this is simply that the ideal scenario is one in which low price complements high MNV. This ensures that:
    • High profitability masternodes are still in heavy demand despite price being low.
    • One hedges against the likelihood of the value of the masternode itself decreasing by much; it is already cheap, relative to its price-history.
  • Then, once you’ve filtered for all of the above, the accumulation process can begin. You are free to set up your high profitability masternode. One word of final warning would be to consider making high profitability masternodes a shorter-term component of your strategy. The longer you run them, the longer you run the risk of supply emission beating out demand and your masternodes (and their rewards) becoming relatively worthless.
The Process (Long-Term Masternodes):

Now, you might be more like me. You might prefer dependable, longer-term masternodes to add to your portfolio. In this case, the bar is considerably lower for MNV and the range narrower for profitability. (This is where the sole distinction lies in the selection process, as the rest of the above outline works across-the-board.) Dependable masternodes are so because of their low inflation, historically sustained demand and stable networks. This kind of masternode is most suitable for passive income purposes.

How do we find them? Well, aside from the filtering process above:

  • Look for coins with an annual ROI between 10-100%. This is a stable range of inflation and still very profitable for a passive income model.
  • Filter for a MNV of 0.25 (25%) or greater. The reason the required MNV is lower for these is due to far less supply emission. Of course, the higher the MNV, the better, regardless of the profitability of the coin. We want more masternodes online.
  • Whilst you are scouring the masternode directories, keep in mind that a few of them – masternodes.online and masternodes.pro come to mind – display graphs that depict the history of masternode cost, masternode count and other useful data. The masternode count data is especially useful, as it allows us to visualise how the network has grown over time. Ideally, we want to see steady, linear growth in the number of masternodes online. This ties in to the idea of historically sustained demand; long-term demand indicates that a potential passive income model may be sustainable.

Common Mistakes and Pitfalls:

In conclusion of this post, I’d like to run through some common mistakes that inexperienced (or experienced) speculators may make:

  1. Buying high: The most common pitfall is buying a masternode when it is extremely costly to do so. This is often due to the allure of high rewards but not exclusively so. Technical analysis remains paramount; by neglecting to cross-compare other analysis with the price-chart, one can fall into the all-too-common trap of buying an overvalued masternode. The closer to the lows you buy your masternode, the more effectively you hedge against potential devaluation, which protects your initial investment.
  2. Ignoring inflation: It might seem lucrative to disregard basic economics in the pursuit of high rewards, but five-digit percentage annual ROI is almost always likely to end up a loser, despite any early gains. The masternodes are usually incredibly expensive and devalue exponentially due to the immense, incessant increase in supply.
  3. Downloading unsafe wallets: This one hits home, as it is a mistake of mine; made in the pursuit of high profitability, to my despair. There will be times when new or less-established coins will come into your cross-hairs. Those unfamiliar with security procedures will unwittingly download potentially dangerous wallets. Refrain from this as much as you can. If you must download a wallet for a lesser-known project, scan the file for viruses prior to downloading and post-download. Further, run them in sandboxes or on Virtual Machines where possible. For further security advice, consult @notsofast’s article here.

I hope this post has been somewhat insightful, and I am happy to answer any questions in the Comments section. Further, what has worked for you in your own masternode strategies? I’d love to hear any thoughts and ideas.


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Disclaimer: This post references an opinion and is for information purposes only. It is not intended to be investment advice. Seek a duly licensed professional for investment advice.

11 thoughts on “#5. The Speculator’s Guide To Masternodes and Masternode Network Value”

  1. Hi Nik, excellent article.

    I’m investigating more about MNs and I would like to know the relation between the price movement and the ROI. The first thing we know about that relationship is that when price drops ROI should drop too, but there are some cases (for example LPC) where the price dropped from $9.00 to $3.30 from Aug 11 to Aug 23, and the ROI went from 796% to 753%. Price went down -63.30% and ROI dropped -5.40%, what is the compensation factor here? More rewards per node?

    Many thanks,
    Santiago

    1. Hey,

      I never measure ROI on masternode rewards in $, as the rewards are being paid in the coin itself. Using $ as your measure will be the reason for skewed data, as you’re then relying on first working out the relationship between the coin and BTC, and then BTC/USD to determine the $ value of the coin rewards.

      The relationship between price and ROI is thus non-existent. They are independent from one another when viewed from the perspective of altcoin-denomination rather than $. Usually, ROI will remain constant regardless of price-action, as it is merely a product of supply emission.

  2. This is one of the best articles on masternodes I’ve read up to date. Really helps with the research process. Thanks for this Nik!

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