Right now, Dogecoin (CCC:DOGE-USD) is a party.
Everybody is having fun. A well-known chief executive officer is referencing the cryptocurrency on social media. Message boards are filled with rocket emojis. Supporters banded together to push the coin to a, shall we say, suggestive level on a suggestive day.
A coin that was worth a quarter of a penny in November is now worth more than a quarter of a dollar. And there is no shortage of bulls putting on “price targets” of $1 or more.
Here’s the thing: All parties end. When this one does, money is going to be lost.
The History of Dogecoin
Up front, I’m not a crypto skeptic. I’m a crypto bull. I believe in the power of decentralized finance, and I’m on record as recommending a number of altcoins that have posted enormous gains.
So when I question Dogecoin, it’s not from the perspective of someone who doesn’t believe in or doesn’t understand cryptocurrency.
In fact, it’s the opposite. If you understand the power of crypto, the case for Dogecoin falls apart.
To be fair, that alone isn’t necessarily a problem. As some bulls might note, the very concept of money is based on a shared societal belief that it was value, particularly with the departure from the gold standard. If everyone believes in Dogecoin, why can’t it be a currency of some kind?
Well, there are good answers to that question.
One big problem is supply. Dogecoin allows for 5.2 billion coins to be mined every year. Admittedly, that’s not a huge portion of current supply (about 129 billion, itself a problem), but other cryptos have far more restrictive and insightful ways of controlling supply growth.
Another is the lack of a use case. There’s no ability to run DApps on Dogecoin. Network updates have been few, leaving potential security risks.
Dogecoin simply lacks most of the features that make cryptocurrencies and altcoins attractive. It’s simply rising because people are buying it, and people are buying it simply because it’s fun. Unlike other cryptos, this is not a project that has the potential to move the world forward.
And that gets to the last problem: the idea of expanding adoption. We’ve seen companies move, if somewhat hesitantly, into the crypto space. Many are accepting cryptocurrencies as payment. Others have coins on their corporate balance sheets.
Those moves, unsurprisingly, have moved prices higher, as traders and investors bet that more enterprises will follow.
Are those enterprises really going to make similar moves with a joke coin based on a dog meme? The Dallas Mavericks professional basketball team does accept Dogecoin — but that seems more like a publicity stunt for owner Mark Cuban than anything else.
History Will Repeat
This is just a game. It’s entertainment. And that’s fine as far as it goes.
But the game will end. The rocket emojis and pumping tweets will stop. We know this — because we’ve seen it before.
When cryptos first got “hot” in late 2017, Dogecoin saw a bit of a renaissance. In January 2018, it peaked at $0.017. The gains were gone in a matter of weeks.
We’ve already seen a 30%-plus pullback. There’s going to be more. Once traders see the end in sight, they’re going to rush to the door, just as they did in 2018, salvaging what value they have. A current market capitalization of $35 billion means there’s a lot of downside left.
Because the only value of Dogecoin is in the game. This is basically a coordinated bubble, with most traders (hopefully) understanding the rules of engagement.
Many of those traders believe that they’ll be smart enough, or quick enough, to get out at the right point, before it all comes crashing down. Many of them will be wrong.
On the date of publication, neither Matt McCall nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in the article.
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