Nodes As a Cryptocurrency Investing Strategy
Despite the rhetoric from cryptocurrency investment naysayers, alternative blockchain investments exist outside trading and token speculation. Savvy traders are profiting greatly from investing in ancillary products and services, particularly those that support the overall blockchain ecosystem. It’s not unlike the California gold rush fever that swept the west in 1849. Although a pithy few made their wealth panning and mining, far more wealth was produced by those providing products and services to the miners. The parallel with today’s crypto industry is somewhat uncanny. For instance, active blockchain investors are not necessarily day-trading various currencies. Instead, they are investing in servers for node hosting and mining hosting.
Consequently, investors should have a basic understanding as to how profits are made in both. For now, we’ll simply review node hosting and how to effectively calculate its ROI (which typically requires a detailed understanding of a node’s purpose, function, cost and revenue). Here we will delve into how to put together a master node investment strategy.
Nodes & Masternodes Explained
A node on the blockchain should be somewhat self-explanatory. Nodes make up the immutable, distributed ledger of recorded transactions, with each node acting as an independent block within the sequence of chains. In most cryptocurrency models, network contributors are incentivized to participate in mining, validating, staking, forging and other active participatory options. Maintaining a node is simply another similar incentive.
In its most rudimentary form, a standard node records transactions and keeps a record of the full blockchain. It thus helps to corroborate what other nodes on the chain record. When network transactions and functionality requirements began to increase in complexity, networks sought to add greater functionality to these network-hosting nodes. Enter DASH and the master node.
DASH was the first to implement the features and nomenclature now common in master nodes. Similar to standard nodes, master nodes record transactions and host the growing block ledger. Unlike standard nodes however, master nodes showcase the following key features:
Increased Privacy — Master nodes allow greater privacy and anonymity for users looking to work in incognito mode.
Increased Speed — Master nodes assist in processing more rapid throughput for instantaneous transactions.
Decentralized Governance & Voting — Master nodes host the ledger for decentralized voting and governance via immutable smart contracts
Decentralized Budgeting & Treasury — Master nodes also allow for decentralized control over treasury and governance of a given coinage or network.
While not all cryptocurrency master nodes are the same, many newer coins feature the characteristics stated above (though variations exist from coin to coin).
Not incidentally, coins with master nodes incentivize investors to host their services. By doing so, master nodes provide investors with both an on-going active and passive revenue stream. That said, investors must be responsible for minor hosting and operational costs.
How to Invest in Nodes & Masternodes
Unfortunately, Investing in a master node is not as easy as simply buying AWS space or hooking up your laptop to a select blockchain network. Networks require investors to provide collateral if they seek to operate a node, usually a set number of coins from the given cryptocurrency. For instance, DASH requires 1,000 units to be included as a master node on the DASH network. In some cases, establishing a master node on a given network may cost an investor several thousand coins in collateral. Node hosts also require an actively-hosted VPS server, a dedicated IP address and ample storage to store the blockchain.
Putting up collateral ensures a given node operator participates positively in the given ecosystem. If not, the large collateralized stake could be greatly devalued. Owning a large stake in a specified currency is perhaps one of the greatest risks of investing in a node. Please keep in mind, this is not investment advice and investing in nodes represents a strategy with high risk.
Benefits & Costs of a Node Investment Strategy
Once a host node is established, incentives (which vary greatly from one currency to the next) are paid according to the governance of a given smart contract. Such an investment strategy can produce recurring, passive and daily income.
However, not all master node programs are created equal. Incentives vary and the barrier of entry can preclude many investors from participating. In addition, a detailed cost/benefit analysis should be actively performed to understand the net/net income from a given node based on both the fixed cost of joining and the variable costs of hosting and managing. In other words, its important to calculate and compare various expected returns.
Investing in cryptocurrency and blockchain has been greatly pigeonholed as risky by many would-be Chicken Little naysayers. However, establishing a master node is one way in which cryptocurrency investors can produce regular, recurring, passive income from their holdings.
Nothing in this article should be construed as investment advice. Investing in cryptocurrency includes a large amount of risk. Please consult with a licensed professional before making business and investment decisions.
About the Author
Nate Nead is an investment banker and Principal Founder of InvestmentBank.com. Nate works with issuers in both buy and sell-side M&A as well as capital formation projects, including initial coin and token offerings, software & technology, real estate and business and consumer services. He resides in Seattle, Washington. Nothing included herein should be considered as investment or legal advice. Please consult with knowledgeable professionals before making investment and business decisions, especially as it relates to initial coin offerings.