This is the current top few masternode coins listed at masternodes.online (MNO), in descending order of RoI (Return on Investment)

Do not buy any of these!

An RoI of 32,000%? That means you make your money back in about 28 hours – you’re going to be rich, right?

Well, no. Probably not.

If it seems too good to be true, it isn’t

So, what’s wrong with those figures? MNO bases them on real data from actual masternodes, right?

Yes, that’s true, and I’m not writing this to complain about MNO – I think it’s a great service (as are all their competitors, I’m sure). The problem isn’t the figures, it’s the way people interpret them. In this article I’m going to try to explain some of the things you should think about when you’re trying to understand what those crazy RoI figures actually mean.

RoI – In what?

The MNO RoI figures simply tell you how long it will take you to earn your masternode collateral in the masternode coin, from a single masternode.

So, let’s say there’s a masternode coin called “Questionable Shitcoin (QSC)” and you need 1,000 QSC to run a masternode. If MNO reports that QSC has an RoI of 100%, then that means at the current payout rate it’s going to take one year for one QSC masternode to generate 1,000 QSC.

So, does that mean you double your money in a year? Not necessarily. There are a lot of other factors you need to consider. Here are a few of them:

  • Market Price Changes
  • Liquidity
  • Payout Changes
  • Technical Problems

Market Price Changes

This is probably the single biggest factor affecting the profitability of a coin, and it’s tangled up with a whole bunch of other factors. Fundamentally, the problem is that, in one year’s time, after you’ve received your 1,000 extra QSC that your masternode has generated, 1,000 QSC could be worth a lot less than it is now. It could be worth more, too – that’s the gamble masternode holders are taking.

The real question is, if you’re looking to ‘double your money’ in a year, what do you mean by money? Mostly, people measure their crypto-assets against either US dollars or Bitcoin. So, until you convert your QSC into whichever of those assets you care about, you haven’t made any profit at all – no matter what MNO says your 2,000 QSC are worth right now.

If you look at the price graphs on MNO for any given coin, they mostly follow a similar pattern:

DASH/USD
GIN/USD

Masternode coins are pretty new. DASH is the oldest, dating back to January 2014. GIN (which I picked more or less at random) is much newer, but the price graph has a similar shape. It’s tempting to blame the rise and fall on the bitcoin price bubble of late 2017, but that clearly doesn’t apply to GIN, since it only launched in February 2018, after the bitcoin price had already declined.

Masternode coins tend to start out at a price based on whatever the team behind the coin can get for it during a pre-sale – i.e. before the coin is listed on an exchange.

At this point, there are usually very few masternodes running, so the payouts are very frequent, and so the RoI looks very high. This is when the FOMO really kicks in, and attracts a lot more buyers, driving up the price.

To the moooooon!

If the team manages to generate enough interest, and raise enough money from the early buyers, they’ll list the coin on one or more exchanges. This is when the early buyers, if they’re lucky and smart, can cash out, selling their coins to everyone rushing to the exchange in a FOMO-driven stampede.

As more and more buyers come in and set up masternodes, chasing that sweet, sweet RoI, a few things start to happen:

  • More masternodes mean each masternode earns fewer coins per day, so the RoI goes down.
  • New masternode holders start selling their masternode rewards on the exchanges, along with any early holders who decide to cash out at this point.
  • As the supply of coins on the exchange rises and at the same time the RoI declines, the price of the coin drops, and we enter a vicious spiral.

At this point, most of the people who came in looking for high RoI on a high-value coin are left holding bags of coins that are worth a lot less than they were before. Some of these folks will cut their losses and sell up. Some will keep the faith, and hold onto their bags (and run their masternodes) in the hope that the price will rise again.

Are you sure you want to HODL those bags?

How far the coin’s value falls depends on a lot of things – how active the community is, how committed to the project the team are, how much people believe in the vision and use case of the coin – the same long term factors that govern the success of most software projects.

Liquidity

So, your masternode has been steadily generating QSC for the past year, and now you’ve got 1,000 QSC to sell. Is anyone buying?

The price on MNO is generally the price of the last trade on whichever exchange(s) they are monitoring. But, just because the last person (or bot) who bought some QSC paid a price of 50,000 sats, that doesn’t necessarily mean you’ll be able to get 50,000,000 sats for your 1,000 QSC.

Check the history of trades in your coin on the exchange. If volumes are low, and the spread (the difference between the highest bid and the lowest ask prices) is large, you might see occasional, regular trades of small amounts at a price near the lowest ask – almost as if someone were trying to artificially prop up the price. Shocking, I know.

If the volume of QSC that trades on the exchange is high, relative to the amount you want to sell, then you may be able to unload yours without affecting the price too much. But, if 1,000 QSC is a lot, relative to the trading volume, then you might not be able to sell it at the price you want – or even at all.

Payout Changes

The MNO RoI figures are based on the last 24 hours. But, just because a QSC masternode earned 50 QSC (for example) in the last 24 hours, that doesn’t mean it will earn 50 QSC/day for the next year.

Most masternode coins try to maintain a consistent block rate, and the payout per masternode will reflect this. So, let’s say the QSC blockchain tries to maintain speed at one new block generated every minute. There are 1,440 minutes in a day, so if there are 1,440 masternodes in the network, then on average they should each get one block reward per day. If another 1,440 masternodes are created, so we have 2,880 in total, then each masternode will get a reward, on average, every 2 days.

If a masternode coin is very popular (often because of a high RoI), then more people want to run masternodes. More masternodes means fewer rewards per masternode, so the RoI goes down. Over time, this should be a self-regulating mechanism like the bitcoin hash rate, but it can still fluctuate quite a bit in the short term. And the short term is all we really know about, at this point, since most masternode coins are only a year or two old.

Technical Problems

This covers a whole multitude of issues including:

  • The development team dispersing (due to personality conflicts, finding other things to do, or out and out exit scamming)
  • Security vulnerabilities in the coin’s protocol
  • Hard forks to fix security vulnerabilities or add new features
  • Hit and run mining problems (on PoW (proof of work) chains, where mining pools mine a bunch of coins and then stop, leaving the chain with much less hash power but a very high difficulty – this can drastically slow down a blockchain, and may take a while to sort itself out)
  • Exchanges getting hacked and/or shutting down, leading to a loss of liquidity

All of these and more can affect the generation, liquidity and price of your coins.

Conclusion

This article might come across as being very negative. It’s not meant to be. I love messing around with masternode coins (although I only play with money I can afford to lose). They’re a fun way to learn about blockchain technology, and if I’m careful I might even make a couple of bucks – or, at least, not lose too much! I’ve been bitten by all of the problems I’ve mentioned here, and I hope this article helps other people to make careful, informed decisions.

Please leave a comment if you found it useful, or if you agree or disagree with any of my points, or if you think there’s something else I should discuss.

3 thoughts on “Masternode RoI – the sad truth

  1. “but that clearly doesn’t apply to GIN, since it only launched in February 2018, after the bitcoin price had already declined.” Are you serious? It hasn’t declined in one month… Are you publishing this to get attention? Poor research and clearly written from someone who doesn’t get it.

    Like

    1. I’ve got nothing against GIN.
      The point I’m making is that, like most other masternode coins, it has followed the same price curve – rising initially, then falling significantly.
      I’m glad the price hasn’t dropped as far as many other coins. I’m also glad I didn’t buy any in June at $15.

      Like

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