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.

The Precedence of Price

AD: Before I begin this post, I’d like to briefly mention Bitcoin.Live, who are sponsoring my blog.

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I’d like to preface this post by mentioning that this, unlike the vast majority of blog posts I publish, is expressly aimed at newer speculators, with little to no familiarity with markets.


The price paid for any asset is the single most important aspect of speculation, and one that largely determines the profitability of said speculation.

This idea is drummed into our heads by the most successful traders, investors and speculators of all time; and justifiably so.

Whilst investors like Warren Buffett refuse to acknowledge the long-term utility of technical analysis, relying solely on fundamentals in their decision-making process, they all – going all the way back to Benjamin Graham – make the concession that price is paramount. Price is both fundamental and technical in its nature, with all technical analysis deriving from two data-points: price and volume.

For the purposes of this post, we will be focusing on price, as it is the most critical component to your decision-making process.

Now, the problem with a sole reliance on fundamental analysis is that it often disregards the price-history of an asset. Whilst there are many valuation models in equity research that allow for a relative measure of cheapness to be determined, this is not the case with cryptocurrencies, at present.

In this space, we rely heavily on past prices for an indication as to the relative value of current prices. This is because fundamental analysis is very much in its infancy within the cryptosphere, and those valuation models do not yet exist, thus technical analysis is critical to prevent from overpaying for any given altcoin; an act that renders profitability highly unlikely.

A project might be impeccable in its fundamental quality, comprising of an engaged and growing community, consistent development, a working product and unique use-cases; but if you enter a position in that project at or near all-time highs, there is a strong chance that you spend a long time underwater or even realise a loss. Indeed, gravity is far greater a force within this particular asset class, and no amount of structural soundness will prevent the eventual (and cyclical) collapse.

As such, a study of price-history is indispensable when considering an entry for a new position. In fact, if you do nothing else in your research except study price-history, you will likely be doing enough to find some degree of success.

Now, this is all exceptionally simple; intuitive, one might argue. And so, I’ll refrain from rambling on any more. Rather, I believe it will prove useful to provide some examples of this concept of relative cheapness, if only to illustrate its simplicity.

First, consider all that has been said thus far. All we are looking for are periods of cheapness and dearness across price-history – in essence, we are reframing the concepts of support and resistance and simplifying them.

Below are printed the before-and-after charts of several coins. These are just a sample of the dozens and dozens of examples that are available in the market:

DOGE:

Dogecoin is perhaps the best possible example to illustrate this concept, as it has experienced numerous market cycles in its price-history. Looking at this first chart, intuitively, which prices look as though they are cheap and which look expensive?

Here, I have depicted my thoughts on this, where there is a price range of extreme cheapness, which has only been traded 4 times; a price range of cheapness, which has been traded 8 times; and a range of expensiveness, which has been traded 6 times.

Those that have bought within the extremely cheap range have been rewarded every single time with a possibility to sell within the expensive range. Those that have bought in the cheap range have been rewarded 5 out of 7 times with the same opportunity (excluding the current, 8th touch of this range) without experiencing price trade inside this range a second time prior to reaching the expensive range. To clarify this, look at the 2nd and 6th periods of price trading inside the cheap range: subsequent price-action took price up and out of the range but fell short of the expensive range, moving back inside cheap before making another (this time successful) run at expensive.

In all of Dogecoin’s price-history, buyers below 50 satoshis have been rewarded with an opportunity to sell above 100 satoshis, no matter when they decided to buy below this point.


STEEM:

Now, above is printed a STEEM chart, but I have excluded the first few months of price-history simply because it was an anomaly that massively distorts the chart. This is often the case when coins first begin trading, as circulating supplies are extremely low, drastically affecting early pricing.

Where, on this chart, would you consider price to be cheap and where is it expensive?

Clearly, there is one price-range that indicates relative cheapness across STEEM’s price-history. This range has been traded inside on 3 separate occasions. Each entry within this range has been reward with an opportunity to sell inside the expensive range except the most recent one, from which price is only just exiting. If we look between the 2nd and 3rd entries into the expensive range, we can see a failure for price to return to cheap, and thus bargain hunters would have missed this opportunity; a risk always present for those who adhere to the approach of buying at the very extremes of relative cheapness.


BCN:

BCN is an interesting case, as it spent a long time in a relatively tight price-range before experiencing several cycles in quick succession. Where would you consider price to be cheap for BCN, and where is it expensive?

Now, whilst this entire exercise is largely subjective and open to interpretation, BCN in particular is a trickier case. Whilst I doubt anyone would argue against there being a cheap range below 20 satoshis, I have marked out the area above it (between 30-40 satoshis) as relatively expensive rather than, say, less cheap or relatively cheap. That is because this range between 30-40 satoshis has only acted as a catalyst for a move towards the expensive and extremely expensive ranges once without price also moving into the cheap range. It has also acted as a range from which price has actually declined back into cheap without moving any further up on two occasions.

You might feel that this is actually still a relatively cheap range, and that is your call to make. For me, there is only one range that I’d be buying, and that is below 20 satoshis. Now, every single time price has traded within this range, it has been followed by at least a move up to 40 satoshis, with the more common pattern being a move up towards the expensive and extremely expensive ranges.

Price is currently trading inside the cheap range for the 5th time in BCN’s price-history.


SC:

Siacoin has a beautiful price-history, with very clear areas of relative cheapness and dearness. Looking at the above chart, where would you expect these to be?

Clearly, the range below 50 satoshis is extremely cheap; this range has only been traded within on 2 separate occasions. There is, however, a more recent cheap range that has formed just above it since around November 2017. Why is this range relatively cheap? Because it – like the extremely cheap range – acted as a catalyst for extremely expensive prices.

We have three gradations of dearness depicted, also. There is a relatively expensive range that has been hit 4 times in price-history; 3 of which have occurred after price has traded inside the cheap or extremely cheap ranges.


That concludes the examples, but I would advise you to go and seek out your own examples. The more you study and observe the entire price-histories of altcoins, the more you’ll spot periods of relative cheapness that can be capitalised on. Don’t make things difficult for yourself by seeking out opportunities in altcoins with obscure and clumsy charts; it is unneccesary when there are thousands of coins out there.

I hope this post has provided some insight for less experienced speculators.

As ever, feel free to leave a comment or question below and I’ll get back to you!

Picking Out Microcaps 101 (Revised 2018)

N.B: This is a revised edition of the post I published in July 2017, which featured a framework for filtering for microcaps. Since that post was published almost twelve months ago, much has changed in the space, not least of which being the price of Bitcoin. Consequently, many of the more minute details and figures in the original post are now invalid or ineffective, and a revision of said post feels necessary. I have refrained from changing the style or structure of the post, and have instead simply opted to update whatever information feels out-dated. I hope that you will find it useful.

Microcaps: Coins that have a market cap between 0-25BTC ($0-170,000, at the time of writing this).

Microcaps have long-proved to be the most profitable coins for me, and the process by which I pick them out is rather simple:

Step One:

Direct your browser to www.coinmarketcap.com: Click view all. Filter the list using the ‘Market Cap’ option for $0-100k. Open a new tab and repeat this for $100k-1mn. Click on the button that says ‘USD’ and change to BTC so that the market cap figures display in Bitcoin. Note down all of the coins below 25BTC that show a circulating supply below 1 billion coins. For all of these, also note down their 24H volume in BTC. Cross out the coins with a lower than 2% market cap to volume ratio: if X has a market cap of 25BTC, its 24H volume should be 0.5BTC or more. This is simply to filter for the microcaps that are getting a decent amount of attention. Now open up a separate tab for each remaining coin. From these remaining coins, cross out all the coins that have a total supply that is more than twice the size of their circulating supply (this is usually indicative of a large premine, and that is unnecessary added liability). Make sure that the figure you are looking at is the ‘total supply’, not the ‘maximum supply’. Total supply means the total amount of coins currently in existence. Maximum supply means the maximum possible amount of coins that can come into existence. The ones remaining (there’s usually quite a few) are the ones you will research further.

Step Two:

Head over to Bitcointalk and read through the announcement threads of every single coin that you have left on your list. Make a note of the level of activity in the thread, the number of pages it contains, the last time there actually was communication on there (some coins will be dead), and get a general feel for the community of each coin. Read through the announcement itself to find out where the coin has come from and where it is heading — look for roadmaps, Slack and Telegram channels, and active, communicative developers. Have a look at their websites and block explorers. Remove coins from the list of remaining ones that do not have at least a decent standard for all of the above (room for improvement can be profitable).

Step Three:

You should now have a small-ish number of coins on your list. These are the ones you’re looking to pick up, but whittle the number down even further by doing more meticulous research on how they are currently trading. Remove anything that trades only on Yobit – remove it immediately. Of the other exchanges, CoinExchange, CryptoBridge, TradeOgre and Cryptopia can be great for microcaps. Look at the charts for each of these coins, and spot accumulation patterns: constricted ranges; spikes of high buying volume etc.

Another research tool is the block explorer for these coins. Some may have rich-lists or largest address tabs. Monitor movements within these addresses. Are the largest addresses getting larger over time or are they in distribution? Screenshot the top 25 richest addresses and then screenshot the top 25 again a few days later. Compare your lists. Are these coins in accumulation?

Step Four:

Take the plunge and buy the ones you’re most confident in. It may even take you weeks to accumulate a decent amount of any single microcap project. Most likely, it’ll take months before you start seeing serious returns, but it’s worth it if you have the patience.

I hope this post helps with your research.


If you’ve enjoyed this post and want to receive new posts straight to your inbox, I’ve set up a RSS-to-Email feed that will be sent out weekly; every Monday, 12pm. Just submit your email and I’ll make sure you’re included in the list. Cheers.


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.