Masternodes as an Investment Vehicle

Generally, there are thought to be only two ways to make money investing in crypto: holding long-term, or daytrading. These are the methods most often discussed, but there are many other ways as well. You can mine crypto, you can invest in crypto companies, or you can even work as a developer building solutions using blockchain technology.

The method we are going to talk about today is by using a masternode. This is the closest method to buying a dividend stock and collecting the returns, and many crypto-enthusiasts are finding it to be incredibly useful.

Explaining Masternodes

To start with an analogy, a masternode is to proof-of-stake as a miner is to proof-of-work. Rather than solving complex computational problems to receive cryptocurrency, a masternode has you “stake” a large amount of cryptocurrency and collect fees for updating and managing the blockchain.

Masternodes generally require a large amount of cryptocurrency to be staked, since this disincentivizes bad actors from costing themselves money.

The beautiful thing about masternodes is not only do you benefit from receiving coins in exchange for processing transactions, but your coins then appreciate in value. And to sweeten the deal even more, those coins can become part of your masternode and earn you more coins.

How to Run One

Now that you understand the basics of what a masternode is, it is time to think about how you would go about running one. Much like investing in an equity, you would want to do your research on which cryptocurrency you think is the best investment of your time and money. There are a lot of protocols which accept masternodes, but Dash is the most well-known one right now. The level of risk and reward you are looking for will determine your answer here, but make sure to do your own research.

Two of the main things you need to set up a masternode are storage space and an IP address. Once you have these, you will likely want to set up a virtual private server (VPS) for security purposes.

Now it is a matter of making sure you know how to use the Linux command line, or hiring a third-party service to help set up your masternode. This is your decision, but it won’t cost a lot and you don’t want to risk losing your crypto because you were overconfident in your technology skills.

To get your masternode running, buy the required amount of coins, transfer it to your desktop wallet, and download the blockchain. Now you are ready to go, but will need to look up the actual technological steps from a reliable source.

There are two major mistakes beginners make. First, they fail to keep their desktop wallet open and running 24/7, and second, they forget to configure their wallets to stake their rewards. Both of these mistakes cost rewards over time, and it is best to avoid them from the start.

Examining the Risk and Reward

As with any investment, you want to examine the risk and reward to figure out whether running a masternode on a network suits you. The risk is clear, you are putting up a significant amount of cryptocurrency. There is a slight risk of the coins being stolen, but your bigger worry is the coins go down in value. You would then have a large position in a cryptocurrency which is dropping, and would be exposed to lose a lot of money. Dash has a 1000 unit minimum, which amounts to approximately $260,000 right now. That is a huge investment and shouldn’t be taken lightly. This is where the argument can be made to invest in lower cost coins.

Returns are also important, and you should calculate the implied rate of return by looking at how many coins you are likely to earn on the coins invested. You definitely want to see more than a few percent on this, as this is a risky asset, and you should be compensated for taking the risk.

Finally, to assess your risk, look at the GitHub community and social media around the coins and see if it is relatively positive or not. The last thing you want is to buy into a sinking ship.

Featured image courtesy of Shutterstock.