If you’ve been in the crypto sphere for the last year, you’ve probably seen the interest towards masternodes as a way to earn a passive income. Before we continue, let’s clarify something: Masternodes are a great addition to the network since it increases both its security and stability. They also provide some additional features such as InstantSend (instant transactions), PrivateSend (anonymous transactions), and much more. We won’t talk about the pros and cons of Masternodes as a concept, but we will definitely mention why you should avoid a specific part of it.
Why the ROI is not everything to look for in a masternode
You’ve might have noticed that certain projects offer a ridiculous ROI (return on investment) rate which instantly grabs your attention. This is the trap every “newbie” falls in to. Just because a project offers 1,000 % ROI or even 10,000% of it, this doesn’t necessarily mean you’ll make any money out of it. Confused? Let us explain:
Imagine you want to invest in a Bitcoin Green (BITG) masternode. You need 2,500 BITG as a collateral to set it up. At its peak price, 1 BITG was around $15.
$15*2500 = $37,500
This is the amount needed to get the coins. Let’s say you have set up the masternode and you’ve been receiving rewards for the last 6 months at an average of 100% ROI annual. Since you’ve been running the masternode for that long, it means you already got 50% of your investment back. Ultimately, you have 3750 BITG coins in your wallet. You made money, right? Not exactly. You increased the quantity of coins you have but you’ve lost its value of the past 6 months.
Why? Well, if you go to the CoinMarketCap you’ll see that the price of 1 BITG at the moment is around $2.
$2*3750 = $7500
So, what just happened there? As we mentioned, you have more coins, but the value of your investment dropped with 80%.
This is very common with coins like these. Initially they offer ridiculous ROI % and fall flat on their face after some time. We are not pointing fingers at Bitcoin Green particularly but at the same time we are not confident about the future of the project. You can see a clear example of the value of the coin in the chart below.
Be smart. Do your homework
Most of these projects start with a huge amount of pre-mined coins. If the maximum supply of a coin is 10,000,000, the developers have most likely pre-mined 10%-20% of the coins. This means they can sell them through an “ICO” or an auction on their private discord / telegram channels. If you see a coin doing this – it’s most likely a scam.
This is one of the biggest cons about open-source blockchain projects. You can copy-paste (most commonly known as “fork” from the code) from an existing project and change the name of the coin (the supply of the coin) slap a new logo, create a website or a Bitcointalk post and you’re done. You’ve made your own cryptocurrency. This process usually takes a few hours / days.
Now you understand why there are so many projects which offer a high ROI%. The idea is to take advantage from people who don’t understand enough on how these cryptocurrencies are priced, respectively they exit the scam some time later.
I hope you have understood why and how these projects are created and why you should stay away from it. Also, this was a very brief explanation on what’s going on with these projects. There is so much more to discuss but that’s a story for another day.