The risks with investing in masternodes: Part 1: Business Risks
August 9, 2018
What are masternodes?
Masternodes serve as a form of infrastructure to cryptocurrency projects. The network uses these computers to compute transactions. In return, these nodes generate a stream of passive income.
Masternodes are parts of cryptocurrency projects. Crypto in and of itself is extremely risky. Many an investor has lost more than 100% of their investment more than once playing with this kind of fire. The losses amount to not only the initial capital but also the time and energy used to find and operate the node.
There are many many risks of operating a masternodes, much more than investing in a stock or a peer to peer loan or a “simple token” such as Bitcoin.
Two essential elements of investing are
- Not to lose your capital.
- To have an exit strategy.
The best way to invest in nodes is by doing your research and scoring each project according to a set of criteria. This series will provide some ideas, but it is not a definitive list. This process will help you to fight the hype and your emotions. This process offers some reassurance, but the risks of investing in crypto projects is so high that no method will give you a 100% guarantee.
In this series an analysis of the various risks will be done, in the first part, a review of the business risks will be outlined.
Masternode Business Risks
It is a red flag when the team is not visible on the website. There is some reassurance when the members of the team pictures are on the web site complete with links to their photos and videos of the team members give confidence. It is not a given that these people are real, multiple videos of interviews with third parties go a long way to provide some reassurance.
The team’s behaviour
Any form of suspicious behaviour by the devs cannot get the benefit of the doubt. For example, some devs act strangely, give frivolous excuses or keep repeating the same baseless things and some investors still invest.
I have personally seen a devastating on telegram, that the coin should go up just because it is scarce and he will not create another version before he has regulatory certainty.
Through, tokenomics you can reverse engineer the motivation of the devs to keep the project alive or not. This means that if the developers (devs) have no incentive to work on the project, then you probably not work on this project as hard as they can.
Look out for part-time developers, or developers working on different masternode coin projects.
The key people in the team
A team is made up of various people such as marketing, support, design and development. When the project’s success hinges on only one person, this increases the risk that if this person leaves the project goes up in flames.
What problem is the project they solving?
Coins based on masternodes should be solving a real-world problem, ideally a non-crypto problem. Important: This problem should not be the relative wealth of the inventors of the coin.
- Is it something the market needs and wants or is it a get rich quick scheme for the developers and their friends?
- Do they really need a masternode coin to solve this problem?
- Is the masternode system used to finance a project or to solve a problem using the attributes of decentralised ledger tech?
The way most ICOs or TGE are designed is to provide all the money upfront. This works against human nature. This is the equivalent of paying employees their lifetime cumulative salaries on day one and then expect them to show up to work for the next 40 years…
If a masternode project has a real genuine problem to solve, then the next step is to identify the competition, i.e. those who are providing a product or service which addresses the same issues?
For example, Dash has been one the longest running masternode project. It is trying to compete with cash, sovereign money, bitcoin, bitcoin cash and other minuscule players such as electroneum. Such a collection of adversaries is nothing to sneeze at.
Masternodes are attractive before they offer an opportunity for “passive income”. Passive income is enticing because it will give you financial freedom and the opportunity to retire early. Investing in a masternode may push your financial freedom further way rather then closer, because of the high risk and “high rewards dynamics of these projects.
If your research determines that the business risks are tolerable, i.e. the project has a chance of being around in 2,5 years, makes a profit, that the team is real and they have a genuine intention to further the profitability of the project then the investors need to weigh the risks and rewards carefully before investing.
In the next parts of this series, I will highlight various other risks of investing in masternode projects.
Your comments, how do you check a masternode project before investing in one?
Not investment advice. Not financial advice. Consult your financial advisor. Not a recommendation to buy, sell or hold. The staff of this site may own this digital asset/s mentioned on this page. Investing is risky and you may lose all your capital. See full disclaimer.
Also published on Medium.