HIGHLIGHTING THE IMPORTANCE OF THE ATTRACTIVENESS OF CRYPTO ECOSYSTEMS
“Passive income” they said!
Last year I wrote an article about POS coins and passive income in crypto that also covered masternodes (https://medium.com/@JiuCrypto/thinking-out-loud-about-pos-coins-and-passive-income-in-crypto-101e6735b651). At the time I wrote that article the POS coins, and especially those with a very high ROI (Return on Investment, annual) were still very profitable. Since then, my view RADICALLY changed.
So, what happened? Well, basically the same things that happen very often when an idea gets successful: The success attracted many new people in a very short time. But not only buyers and stakers but also influential hypers that shilled (in their youtube channels, discord and telegram groups) too many non-solid high-staking POS coins they accumulated cheap just for a quick buck. Also, shady devs were attracted and created more projects that lured people with a high POS ROI.
A very similar thing happened to masternodes. When I wrote my 2017 article there existed only a very small number of masternode coins. When masternodes.pro came out in the second half of 2017 you could still count the listings on one hand. Then TOO many people jumped on the train. Shitcoindevs accumulated their own old garbage coins and announced masternodes to dump on the fomo buyers. A crazy number of new masternode coins came out. Now we have masternodes.pro, masternodes.online and mnrank.com and ALL look like coinmarketcap in the meanwhile, having dozens over dozens of coins listed. People were attracted by the sweet promise of earning money from doing nothing and many lost much of their investments.
But why and how did many people lose money with high-staking POS coins (30%-1000% per year or even more) and masternodes? Weren’t they supposed to be a source of passive income?
Well, what happened was that there were just TOO many new projects. So, the fresh money entering these asset classes (building the buying pressure) had to split up too much. The single projects didn’t get enough fresh money to really rise in price or market cap. People got insecure and impatient and sold. The selling pressure created more insecurity and more people sold.
The illusion of passive income
The reason why people are attracted to high staking POS coins and masternodes is the idea of passive income. Who wouldn’t love to get a lot of “free money” each month? And maybe, if compounded, it is maybe even possible to stop working!? Why would someone buy a flat for 100k and rent it to someone for 400 USD/month when you can just buy a high-staking POS coin for 1k and get 40% staking rewards per month. That is 400 USD as well, right??? Wrong! Because people forget about one thing: Inflation (the increase of supply of a coin). Masternodes and high staking POS coins would be AWESOME if you were the ONLY person getting those high rewards. But as those projects are often BUILT around the staking and masternodes MANY or probably MOST of the people on board are staking or having masternodes. This means that the ecosystems are subject to a VERY high inflation. Don’t forget:
https://twitter.com/Crypto_Bitlord/status/980782696480698368
“If you have an edge and then everybody else has that same edge, it’s no longer an edge” (@Crypto_Bitlord)
If the buying pressure on the ecosystem is by percentage smaller than the inflation what will happen is DEVALUATION. Example: A masternode coin with a market cap of 4 million has masternode rewards of 120% / year. Let’s say that 75% of the coins are locked in masternodes. So we have an annual inflation of 90% (even a bit more as it is compounded). This means the inflation per month is 7.5%. 7.5% of 4 million equals 300k. This means that a “fresh money influx” of 300k is required every month just to keep the prices stable. And it is getting more every month. If less money is entering the ecosystem or if money is even leaving the prices per coin will go down.
If you have an ROI of 7.5% per month but the coin’s price dropped 20% at the same time is it still considered passive income? You lost money, dude! You would have been better off with just keeping FIAT.
Another example: A high staking POS coin with a market cap of 2 million has an ROI of 720%. 80% of the coins are staked. That means the annual inflation is 576% even if you don’t consider the compounded interest (actually it is a LOT higher). This means the inflation per month is 48%. Consequently 960k (!) need to enter the ecosystem every month just to keep the prices stable. Do you really think this is realistic for a project that has NOTHING to offer but a high POS ROI that DOZENS of other projects offer as well? Devaluation will kick in with full effect sooner or later… Do you still want to brag about your smart passive income play at your family’s Christmas dinner?
So, what’s the point here?
Does that mean that NO masternode and high staking POS coin make sense at all? Not in general. But there are some ground rules you should apply at and questions you should answer for yourself before entering one of those asset classes.
A very important question is: Is there anything attractive about the ecosystem apart from the masternode or POS rewards? Are there innovations? Does the project offer something unique? Does it look like a solid long-term investment? Or is the whole project just built around the masternodes or staking rewards?
Believe me, if you REALLY try to answer these questions you will see that 90–95% of the masternode coins and 95–100% of the high staking POS coins don’t offer ANYTHING with real potential and only have the masternodes or POS rewards to attract people and money into their ecosystem. I recommend to never buy a coin like that (for advanced traders there might be exceptions as shit coins or even scam coins often have the best pumps). Remember: High POS or masternode rewards can even be a downside that makes an ecosystem less attractive. How that? Well, for masternodes or regular staking rewards there is a threshold. If people can’t afford that they most probably don’t want to be part of that ecosystem as their coins would get devaluated over time without increasing in number. So they don’t buy into this ecosystem.
Especially for high staking POS coins you could ask the question this way: Which solid project with long-term vision would EVER give out POS rewards of over 30% per year? This would be a huge disadvantage for those users / holders that (for whatever reason) are not staking as their investment gets most probably devaluated. This would be a big downside for the ecosystem to evolve and get broader adoption! The masternode ROIs for SOLID projects (there are really not many imho!) usually go down over time when more masternodes are set up. Look at DASH and PIVX as extreme examples: Their masternode ROI is usually only 5–10% per year. That doesn’t mean they are bad investments. MUE is at about 20% which is still not too high.
TO MAKE IT VERY SHORT: NEVER GET LURED BY A ROI! LOOK FOR REAL POTENTIAL!
A guy on twitter named El Crypto Chapo once said you should ask yourself if you would buy a coin even if there WERE NO masternodes (same can be applied to staking rewards; source: https://twitter.com/El_Crypto_Chapo/status/965261235523534848). I am not wondering that @notsofast liked this approach. I guess this is the BEST way to decide for yourself if you should get a coin or not. If no, skip it immediately (this applies for the ABSOLUTE majority). If yes, great! Buy it. Set up masternodes or stake it so you are not at a disadvantage compared to those who do it.
But be VERY careful, staking usually requires hot wallets and masternode coins usually have no hardware wallet support. Please be mindful of your security.
In the end it is not important if the ROI is 100% or if there is no inflation at all (as in tokens or some DAGs). What counts is only one thing:
THE ATTRACTIVENESS OF THE ECOSYSTEM.
If the ecosystem is attractive for whatever reason (important point: innovations!) the market cap will grow as more and more people join it and bring fresh money with them. If the ecosystem is overvalued more and more money will leave.
If you find an ecosystem you fundamentally like and it has an inflation, try to be on the right side of inflation. That means take advantage of the ROI by staking or masternodes if possible. If it is a POW coin it gets a bit more complicated as you can’t get new coins without mining. Always mind the inflation and selling pressure by miners in POW coins though. I will elaborate this more in my next article on profit taking.
Here are some masternode and POS coins I consider very interesting myself. Maybe some of you might like to have a closer look:
MASTERNODES:
XSN, BIS (mn coming soon), SYS (mn coming soon): these three are my favourites
PIVX, BLOCK, XZC, MUE
POS:
DCR, XSPEC, NEBL, RADS, BLK, EQT
These are just some suggestions.
I really hope this article provided you some tools to decide ON YOUR OWN which POS / masternode coins or which coins in general are interesting for you! Enjoy researching and only invest what you can afford to lose without losing your smile!
Feel free to follow me on Twitter: https://twitter.com/JiuCrypto
