EOS | NEO | Cryptocurrency Inflation and Siren Song of Proof of Stake (PoS) Mining Rewards

in bitcoin •  15 days ago

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“I can resist everything but temptation” - Oscar Wilde

We have all felt the lure of cryptocurrency’s siren song. Its mesmerizing tune echoes deeply within our souls. It’s a promise of glory and riches, but most of all, it’s the idea that one day we can obtain financial freedom.

A part of us knows it’s a trap, but we are masters of convincing ourselves that we can control our destiny. We tell ourselves that we are unique and despite the tragic tales of other cryptocurrency traders, we ignore our better instincts and are just glad that fate has given us an opportunity to show the world that we have been chosen for a higher purpose.

“This time it will be different” becomes the anthem to justify breaking our most sacred trading rules.

The siren song I speak of are cryptocurrencies that have a staking interest rates.

This is a good time to note that a cryptocurrency interest rate and inflation rate two different things because inflation can mainly be caused by creating mining rewards, however it can also be caused by the release of coins into the market from other pre-planned events. Therefore, it’s critical to be aware of a cryptocurrency’s coin supply, inflation rate, and interest rate, as these attributes can affect price.

The most extreme recent example is the epic fall of Embercoin (EMB) that, until recently, initially had up to a 7200% staking reward. While this means that you should see ROI at least equal to the interest rate, it also means that same number of coins are being introduced into the market to pay out the rewards.

Simple economics has shown that hyper-inflation has a negative effect on fiat currencies by eroding their real value. Put simply, the amount of money a person holds in a country with hyper-inflation becomes worthless as over time, it takes more money to buy the same good or service.

The same concept applies to cryptocurrencies.

This guy heard cryptocurrency’s siren’s song and earned 28k in 24 days on August 27. Let’s be honest, that is a dream for most of us. Just not a sustainable one. Let’s hope that he was able to sell along the way.

Kryptonaut Trading Tip: Never count your chickens until they are sold. In cases where a price drops fast or there is no demand, you can easily be wiped out faster than green grass through a goose.

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At that 7200%, even the best of us might think of risking $100 for a chance that we end up with $7200. However, it’s a promise that can never be fulfilled. At its peak, EMB had a market cap of over 9 million and in within twenty-four hours it dropped to 3 million. Then, over the course of 2 months it now has a market cap of just 300k. In every practical sense, it’s a dead currency. RIP EMB. You now live on to warn others that financial freedom cannot be achieved through a high staking ROI.

However, in some cases, a high reward and inflation can be beneficial. If you notice here, some of the most well-known cryptocurrencies have started out with high inflation rates to entice buyers. The difference is, the inflation rate is does not stay high.

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Who can blame anyone that gets snared. Watching and dreaming about the value of your portfolio holdings increasing is much like being in love. It’s a powerful and intoxicating drug that kicks your endorphins into overdrive. It’s something that you dream about at night and something you always think about during the day. It takes experience and discipline to counter it as your body is telling you that it wants more of the same feeling.

My goal is not to criticize the ensnared. It’s to warn less experienced crypto-traders to be steer clear of cryptocurrencies that offer high rewards.

I like to think of it in terms of demand. If a cryptocurrency can exceed or keep pace with inflation then everything is good. If not, then simple economics tells us that the price will drop along with the real value.

supply and demand.jpg

What is a healthy staking rate - one that both entices buyers to hold their stakes and attracts new ones? In my opinion, I think between a 4-7 interest ROI is sustainable along with a controlled inflation schedule that decreases over time.

Before anyone yells bloody murder, there are always exceptions to the rule. Most cryptocurrencies are not built alike. It is up to everyone to do their due diligence and take a good look at a cryptocurrency’s white paper to know exactly how the currency operates.

MASTERNODE LURE

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A few months ago, I wrote a post about the current (at the time) masternode list websites. Some people think operating a masternode is the first step to economic freedom as they typically earn rewards above the average PoS reward.

Masternodes.pro is a good list that shows current masternode ROI. What’s not to like? The siren’s song is strong with a number of these cryptocurrencies as ROIs range from 3 to 300 percent! There are a number of factors that go into the ROI so don’t assume that they will remain constant.

EOS

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Around the same time I also wrote about EOS. EOS recently had a nice run from 0.50 to 1.31, but what EOS is subject to the same forces of inflation. EOS has approximately 500million in circulation. At the end of the distribution period there will be 1 billion in existence. Think this is a good time to buy EOS? Think again. EOS will have nice price jumps but in the long run, until the distribution period is over, it will always have the negative force of inflation working against value and in turn, price.

NEO

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NEO had a novel way to reward stakes and avoid coin inflation. Instead of rewarding stakes in the same coin, NEO avoided inflation by offering an entire different coin – GAS. GAS will incur the effects of inflation while NEO acted more like a pre-mined coin where no inflation exists until coins are released due to a pre-planned event.

There are pros and cons to this model. If NEO is worth 1k and GAS is worth 500, wouldn’t you like to paid in NEO? I guess it doesn’t matter as long as my NEO keeps increasing in price and both prices are relatively the same. In the future if GAS is used more than NEO then the price of GAS should surpass NEO despite inflation.

What NEO can’t avoid is the mathematics of decreased demand as the price increases.

Here is an example:

NEO Price: 1000

A person with a 10k bankroll is only able to purchase 10 shares of NEO. While a person that had 10k and bought NEO when it was $10 has 1000 NEO shares and produces much more gas. While all participants experience the same dividend rate in relation to the number of shares they own, the trader with 1000 shares produces a heck of a lot more than the person with just 10 shares.

When doesn’t this matter? Only if the person with 10k knows that demand for NEO will outpace other available options. In other words, if a person feels that NEO will grow at 20% at the same time all other investment options are likely around 10% then it makes sense to enter a position in NEO at 20%

There is no way no way around this. As the price of NEO rises, the demand for it will decrease.

At this point you might ask why other generous but sustainable staking rewards keep increasing in price. Shouldn’t the same sort of diminishing demand apply in the same way as NEO? Not exactly, other coins that don’t separate their rewards like NEO have utility still going for them. In other words, NEO’s utility is only to generate rewards in relation to how much a person HODLs, while other cryptocurrencies is to generate rewards AND have utility.

I expect (and again – don’t cry bloody murder at me – I don’t claim to be an expert) GAS will have more utility in the future, and the price of it should increase as more people require it for NEO’s platform.

I predict that GAS is a much better long-term investment than NEO (as long as the NEO platform is in demand). Right now, the demand for GAS is low and the demand for NEO is high. That eventually reverse as more ICOs are launched on the platform.

By now, you should either be calling me crazy or I’ve given you a lot to consider. Hopefully you gained at least some value somewhere in this post. If so, please share your thoughts and comments with me and the community below.

Traversing the cryptosphere,
Kryptonaut

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@kryptonaut Nice work. I like what you said by, What NEO can’t avoid is the mathematics of decreased demand as the price increases.does this mean the decrease in the price of steem will increase demand ?

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Hi - If the price of steem drops then that means demand has dropped for it. However, the price will reach a certain level and it will attract buyers back in. Thanks for the comment!

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I like your post!! I'm in Neo from €0,40

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Thanks ! Good luck with your NEO. At that price you are sitting pretty.

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Great post. Embercoin, I guess embers have almost completely died now. Should be renamed to Ashcoin soon to reflect its true status.

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Ashcoin! Ha - forgot about that saying. I'm sure some crypto-traders made some $ on EMB, but a whole lot more lost $.

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A very bad prediction on EOS... You obviously don't understand it. Coin production pushes all cryptos down in price ... Yet somehow, Bitcoin... The most energy consuming coin out there as well as the slowest manages to be above 7k... EOS is able to distribute and capture that otherwise energy loss to feed future R&D... Yes the positive factor you failed to calculate.

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Can you elaborate on what you mean by capturing energy loss? Historically EOS price has steadily dropped. Only recently it spiked but it looks weak. Current price is 0.93. Are you saying that EOS spiked because it finally found its mojo? How come it couldn't capture this energy loss over the past several months?

EOS will be worth more after the distribution. Until then, my prediction stands: it will see spikes but over the distribution period it will steadily drop due to non-utility and inflation.

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Nice thoughtful post. I need to re-evaluate some of the staking coins I am holding.

I'm thinking they are going to be difficult to sell on on exchange, and will have to do a little bit at a time.

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Thanks! I want to invest and forget but I also believe that re-evaluating one's portfolio is a must. Warren Buffet can afford to play the buy and hold game. His positions are massive and leverages his wealth to get a great price and preferred stock options.

I like NEBL for staking. It has a low supply and lots of potential upside, but even that can't escape inflation. However, I hope that a combination of demand and future utility will keep the price going. If there is no utility (or demand) then it doesn't really matter what the staking ROI is. Price should drop. The best combination is around 4-7% reward AND lots of utility to keep up demand.

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nice post

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Thank you!

We will find out that in the near future. However some predictions

Great post. I am really having to re-evaluate what I am currently invested in. It is really difficult to tell which currencies really have the potential to take off. I will say that I am heavily invested in XLM and I really think it is going to do well.

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I am invested in XLM as well, we shall see!

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Good luck with your XLM! Thanks for your comment and thoughts.

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Exceptionally well written, thank you.