THE FATE OF THE DOGECOIN BUBBLE
Updated: Jan 20, 2022
The emergence of cryptocurrencies is by far the most noteworthy financial innovation of the century, ahead of even online and mobile banking. It has the potential of taking over the world like an alien invasion, probably terrible but possibly benign. But while many still struggle to understand the foreign dynamics of its volatile movements, futuristic candidates have set their sights to capitalizing on its reputation as one of the world's greatest candy lands.
Cryptocurrency initiates bring their forks to the party and through technical, fundamental, or sentimental analysis, look to predict the next period of volatility or, in the best case, the bubble.
WHY CRYPTOCURRENCY INVESTORS LOOK OUT FOR THE BUBBLE
It's simple. During a bubble, assets are traded at a price range that massively exceeds the asset’s intrinsic value. A brief look at the Dogecoin reveals this much. It might not be too difficult to notice that the price movements have been largely unrelated to its underlying value.
At the start of 2021, Bitcoin, the father of cryptocurrencies, experienced the first notable bubble, rising in price like a yeasted loaf. This only brought on the usual speculation that digital cash is nothing more than a bubble-driven market powered by euphoria and manipulation. But Bitcoin is a genuine monetary invention and is already making a name for itself in the global economy.
However, the main focus here isn’t Bitcoin.
This slight deviation is to prove that no cryptocurrency has escaped being placed under the microscope and viewed as a bubble. Neither has Dogecoin, the hottest cryptocurrency in town at the moment. But before we talk about the bubble speculation associated with Dogecoin, a little background information on the cryptocurrency wouldn’t hurt, would it?
DOGECOIN TO THE MOON??
Dogecoin was created on December 6, 2013, as a parody crypto - a “fun” alternative to Bitcoin. Billy Markus, one of its creators and a software engineer in Portland, openly stated that he created the coin by copying the code used for Bitcoin and adding the picture of a funny dog. According to Markus, he “threw it together in about three hours” and not much 'mind-blowing' development has been done since then. One could say that the digital currency started as a joke - especially since its logo is the image of a Shiba Inu – a Japanese breed of dog. Dogecoin has its technology embedded in Litecoin, the third-largest cryptocurrency as measured by market capitalization. Dogecoin is also known for its low price and unlimited supply. In summary, it was created as a consumer-friendly and pointedly satiric version of Bitcoin.
One interesting fact about this digital currency is that it has one of the largest and most active communities in the world of cryptocurrency. This community has worked towards funding charitable projects. Another interesting thing to note about this coin is its inflationary nature, as opposed to the deflationary nature of most cryptocurrencies. This implies that there is no maximum limit to the number of Dogecoins in circulation.
Dogecoin has a few niche markets, including serving as a means to tip online artists, especially in Reddit. Besides the few niches, however, the coin has little real-world use. Usman Chohan, an economist at the University of New South Wales Business School, said, “Dogecoin is not so much an alternative deflationary numismatic instrument as it is an inflationary leisured exploration of community-building around a crypto asset.” This is as a result of the charitable causes the coin is mostly used for.
Although the coin was supposed to be a joke of sorts, no one was laughing when Dogecoin’s price began to rise in relation to other popular cryptocurrencies in 2018. Presently, Dogecoin has a market value estimated at over $40 billion. The coin has been gaining more popularity and climbing again in the past week. As a matter of fact, the value of the digital currency rose by 400% in seven days, and according to CoinMarketCap, it is the 5th most valuable cryptocurrency on the market. Not so much of a joke now, is it? Or not?
THE MUSK EFFECT
It would be wrong to talk about Dogecoin without mentioning the man who has brought the coin to the limelight in recent times – Elon Musk. Elon Musk is a South-African-born American entrepreneur who co-founded PayPal and formed SpaceX, maker of launch vehicles and spacecraft. He is also the Chief Executive Officer and one of the major investors of Tesla, the electric car manufacturer. Musk’s net worth has grown so much that he is now one of the wealthiest men on the planet.
As wealth brings power, he is also one of the most influential men globally, so it is no surprise that many would take his words as gospel, and Dogecoin has been better off because of this. Elon Musk is a staunch supporter of Dogecoin. After every tweet he makes on Dogecoin, the coin’s value skyrockets, an occurrence one could term as the “Musk effect.”
On April 1, he tweeted, “SpaceX is going to put a literal Dogecoin on the literal moon.” Note that “to the moon” is a phrase used by crypto traders when a digital currency is about to make a significant price increase. In another recent tweet Musk said, “Doge barking at the moon.” He shared this tweet alongside a photo titled “Dog Barking at the Moon,” a painting by Spanish artist Joan Miró. Soon after, Dogecoin experienced a boost, soaring more than 100% to hit an all-time high of $0.29. An earlier tweet in February saw Dogecoin going up to 50% in trading. At that time, he stated, “Dogecoin is the people’s crypto.”
Another unlikely supporter of Dogecoin is Snoop Dogg. The price of Dogecoin soared when the American rapper joined Musk and Gene Simmons, another Dogecoin supporter, in tweeting a meme of the Japanese dog that represents the Doge token. The tweets of this trio caused the cryptocurrency to rise above other cryptocurrencies, placing seventh on the list ahead of Chainlink, Bitcoin cash, BNB, and Litecoin.
THE BUBBLE POTENTIAL OF DOGECOIN
Yes, Dogecoin has gained increasing popularity recently, but does that guarantee its reliability? In truth, Dogecoin’s skyrocketing price and rising popularity have led to concerns of a bubble in the cryptocurrency market.
As much as Musk’s tweets have caused a boost in the value of Dogecoin, some influential investors have serious doubts. One of these is Nic Carter, co-founder of Castle Island Ventures, who warned other investors of the risks involved in Dogecoin. He called Dogecoin a "Vehicle for Speculation" and warned that investors are certain to lose money.
Another analyst, David Kimberly, said, “Dogecoin’s rise is a classic example of greater fool theory at play.” He stated that people were buying the digital currency not because it had any significant value but because they hope others will buy, push the price up, and then they'll sell off and make some major profit. If this is the case with almost every investor, the bubble will eventually burst, and whoever doesn’t get out in time will be left hanging.
If one looks at the surge of Dogecoin with a critical eye, one would realize it wasn’t an effect of any economic incentives – the currency was never created to be a reliable payment system or a store of value. Instead, the surge occurred following a series of tweets and Reddit threads that ignited a certain level of excitement in crypto investors; we all understand the power of social media in influencing the public’s decision. And one major mistake anyone would make in investments is relying on emotions, which is a mistake crypto novices are likely to make.
Adam Zadikoff, Chief Operating Officer of popular crypto wallet BRD, predicts that the excitement surrounding Dogecoin, which was nowhere on the radar before it suddenly rose from near obscurity to the limelight, will lead many investors to regret. His advice is that whoever invests in Dogecoin should do so with money that they are willing to do away without, in case it all comes crashing down. His best bet is safer cryptocurrencies like Bitcoin and Ethereum, as they have proven themselves to be true despite their volatility and unpredictability.
Large and clever investors can be deliberately misleading. Late in the Napoleonic Wars, between France and Britain, wealthy investor Nathan Rothschild, a major funder of the war, started selling off his British bonds. Other investors thought Rothschild, the influential investor of his time, might have insider knowledge that Britain was losing the war, and this pushed them to sell off their bonds. Rothschild repurchased as many of the now cheaper bonds as he could, knowing of course that the war was favoring Britain. Britain did indeed win, Rothschild made a massive profit, and other investors were left to sulk.
Was Elon Musk’s comment about Dogecoin because he is actually a fan of Dogecoin or because he is ready to sell his holdings in Dogecoin when the price skyrockets? Well, Elon Musk, the so-called preacher of Dogecoin, only accepts Bitcoin as the digital currency for the purchase of Tesla.
SHOULD YOU PUT YOUR MONEY ON THE DOGECOIN BUBBLE?
Despite our warnings, and while Dogecoin continues to gun like a rocket on a mission to the moon, one should not be so quick to write off Dogecoin as a bubble waiting to burst. Sometimes, bubbles can be very difficult to predict; some can get bigger and last longer than most people think they will. In retrospect, nearly all cryptocurrencies have been regarded as a bubble. Earlier this year, Bitcoin was also considered as a bubble waiting to crash, especially with the sudden increase in its price value at the start of the year. This turned out to be wrong.
Dogecoin started as a joke, but it doesn’t have to continue as a joke. Bitcoin wasn’t taken seriously when it was first created. Remember the guy who purchased two pizzas for 10,000 Bitcoins in 2010? Well, he had Bitcoins. Many investors didn’t believe in Bitcoin and hence, didn’t take it seriously. Elon Musk, a huge critic of Bitcoin in the past – he called it “BS” in one of his tweets – said he wished he had purchased Bitcoins earlier than he did.
Any investment comes with risk, even much more when the asset is crypto-related. Many have made profits as much as they have made losses on more “proven” cryptocurrencies like Bitcoin and Ethereum. It is a package deal – investments and risks.
Lets go back to Zadikoff’s very good advice: you should invest in Dogecoin with money that you aren’t afraid to lose. And even then, whether it is money you are willing to lose or not, your surest bet is completely detaching your emotions from your investments. Whether it be Dogecoin or Bitcoin, or Ethereum, don't get your hopes up.
The surge in the value of Dogecoin came as an aftereffect of rising excitement of the public, spurred on by a series of tweets and threads. But as a critical investor, you should weigh the pros and cons of investing in Dogecoin before you decide it’s worth your attention. If it turns out to be a bubble, you wouldn’t want to be caught up in the burst. In the end, no one wants to lose even the money they aren’t afraid to lose.
So, is Dogecoin a bubble waiting to burst? Maybe and maybe not. Do you think it is worth investing in? According to some investors, no, while others believe it can fly to the moon.
Bottom line: like any investment, research, research, research, and make the best decision for yourself.
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