Dogecoin started as a joke but are we still laughing?
Q1 2021 hedge fund letters, conferences and more
A social media frenzy sent Dogecoin (CCC:DOGE:USD) up 8,100% this year and the gains show no signs of slowing down. But while the outsized returns are undeniably attractive, it’s worth noting that DOGE has no intrinsic worth. The coin’s value is largely driven by the price people place on it. Dogecoin is a bubble, and if history has taught us anything, it could burst at a moment’s notice.
If you’re just hearing about Dogecoin, here’s a mini backstory: the cryptocurrency was created by two engineers as a satirical alternative to Bitcoin. But the coin, an ode to the Shiba Inu Japanese breed dog, soon became a social media phenom.
The spark that lit this frenzy can be attributed to Elon Musk who tweeted a picture of ‘Doge’ Magazine. Keeping with the so-called “meme culture”, other celebrities like Gene Simmons and Snoop Dogg soon expressed their support of the currency as well. Adding to this fuel was the surge in the price of fellow cryptos like Bitcoin (CCC:BTC-USD) and Ethereum (CCC:ETH-USD) that propelled the value of Dogecoin to new highs.
The joke soon became a real asset as people started piling their money into it. But when the market takes a turn for the worse, fortunes will disappear in an instant. Here’s why I’m bearish on Dogecoin despite the recent gains.
Why Staying Bullish On Dogecoin Is Not A Great Move
From quirky meme to a mainstream cryptocurrency, Dogecoin’s claim to fame was swift. In just a few short months, the coin garnered an asset value of $50 billion- worth more than Ford Motors (NYSE:F) or Marriott International (NASDAQ:MAR). The surge was a result of investors piling money into the coin-leading to unimaginable gains. But while the returns are juicy and have even birthed some millionaires, the coin offers no long-term value.
Unconventional investments are known to deliver abnormal gains but these fortunes could reverse at any time. A great example of this GameStop (NYSE:GME) stock that saw some parabolic gains earlier this year. After briefly hitting its peak of $400, the stock came crash landing back to earth, now trading at just $178.58. This could very well be the case for Dogecoin which has already lost about 40% of its value. But the more important lesson here is that cryptocurrencies are incredibly speculative and volatile.
Unlike Bitcoin, the world’s most valuable cryptocurrency, Dogecoin has no limit on the number of coins. The circulation of Bitcoin is currently capped at 21 million but there are more than 130 billion Dogecoins in existence. For Bitcoin, the limit in its supply remains its most attractive feature as it serves as a great hedge against inflation. On the other hand, Dogecoin’s lack of scarcity means that this investment is purely driven by the “meme culture” and is a bubble that is waiting to burst.
Both assets, however, still remain speculative and lack strong fundamentals. In hindsight, it would be safer to put your money in investments that show true value and have changes in the broader economy backing its price fluctuations.
Part Of A Bigger Story
Although Dogecoin saw some of the biggest gains amidst its crypto peers this year, the surge isn’t an individual event. The recent rally is part of the broader market optimism towards cryptocurrencies. Bitcoin was the leader of this movement with its value surging to $54K from $30,000 at the start of the year. Interest in the coin grew as payment platforms like PayPal (NASDAQ:PYPL) and Square (NYSE:SQ) enabled Bitcoin transactions on their platform. Large companies like Tesla (NASDAQ:TSLA) and MicroStrategy (NASDAQ:MSTR) joined the frenzy, adding billions of dollars in Bitcoin to their balance sheets.
Another major crypto-fuel was the government stimulus. In lieu of the pandemic, the federal reserve pumped more fiscal and monetary stimulus into the economy. Many people put their checks towards social media-driven investments. Scott Knapp, a market strategist at CUNA Mutual Group, likens the situation to the dot.com bubble.
“For every Amazon.com there were 10 pets.com that went bankrupt. Is Dogecoin the pets.com of the cryptocurrency era?” says Knapp.
There is logic to this sentiment because bubbles often tend to steer the price of an asset away from its true value. Big bets on get-rich-quick assets like Dogecoin can overheat the markets, making it a risky investment for the long-haul.
The Bottom Line
Cryptocurrencies are seeing strong momentum this year but a gamble on Dogecoin will only move its price so high. The currency is rife with speculation and has no regulations or fundamentals to back its valuation. There have been numerous investments like this one across the markets this year and many have come crashing back to earth.
Ultimately, the fundamentals of an asset are the deciding factor in determining its true value. For any investment to thrive in the long haul, it needs to have substantial liquidity. That can only happen when investors park their money in an asset for many years.
Dogecoin had a strong rally this year but I won’t be buying into the meme-fueled frenzy.
On the date of publication, Divya Premkumar held a long position in BTC-USD. She did not hold (either directly or indirectly) any positions in the other securities mentioned in this article.
Divya Premkumar has a finance degree from the University of Houston, Texas. She is a financial writer and analyst who has written stories on various financial topics from investing to personal finance. Divya has been writing for Investor Place since 2020.
Article by InvestorPlace
