Cryptocurrency Thesis: Long Bitcoin, Short Dogecoin

In the past, I have been very critical of Bitcoin (CCC:BTC-USD) as a long-term investment. There is no real way to value a cryptocurrency. That’s only one of a handful of reasons I see Bitcoin as a pure gamble rather than a sound investment.

A close-up shot of a Dogecoin (DOGE) concept token.

Source: Shutterstock

I’m neither bullish nor bearish on Bitcoin in the long-term. In general, currencies are typically bad investments. Currencies do not generate cash flow or pay interest or dividends. Cryptocurrencies are no different. They are not dynamic like an innovative tech company. They don’t generate compound returns like a dividend stock or Treasury bond.

But today, I’m recommending for the first time a way cryptocurrency investors can buy Bitcoin and sleep well at night. I’m recommending an idea of going long Bitcoin and short Dogecoin (CCC:DOGE-USD).

Bitcoin Is The Winning Cryptocurrency Brand

It makes no sense to me whatsoever that the world would need dozens of decentralized digital currencies. Cryptocurrency is the alternative to fiat currency. I get that. But why is there a need for alternative alternatives?

Bitcoin is the unrivaled leader among cryptos by virtually any metric you use. It has by far the largest market cap. It has by far the largest daily volume (by value). Bitcoin is by far the most widely accepted as an actual payment method rather than a speculative trading vehicle.

But most importantly, Bitcoin has by far the most valuable cryptocurrency brand. As I’ve said repeatedly, Bitcoin’s only source of value is the belief of its investors. Bitcoin’s price rises purely on the greater fool theory. The makeup of a Bitcoin never changes, so its value will never change.

However, the value of Bitcoin’s brand has exploded in the past five years. Trust is a major factor in determining which currency will set the standard. Bitcoin was the original. It is the largest. It is the most trusted.

“Even Silicon Valley pundits like Chamath Palihapitiya or Jack Dorsey are essentially Bitcoin maximalists – they cannot think beyond Bitcoin and do not acknowledge other cryptocurrency innovations,” says Ajit Tripathi, head of institutional business at decentralized-finance platform Aave.

“In that sense, Bitcoin has some of those religious properties; and such strong sentiments are very valuable.”

Dogecoin Is (Literally) A Joke Cryptocurrency

I get the appeal of Dogecoin. It’s funny. It’s satisfyingly infuriating to all the right people. Dogecoin is a populist social movement. Young, disenfranchised retail investors are giving the middle finger to Wall Street, the Federal Reserve and anyone who has ever told them to stand up straight and get a haircut.

There is a compelling argument for the merits of Bitcoin versus the U.S. dollar over the long-term. I’ll leave that debate for another day. Today, I’m simply addressing Bitcoin versus Dogecoin.

I don’t know if cryptocurrencies will replace fiat currencies or gold in the long-term. But if they do, I believe Bitcoin will ultimately extend its lead as the best-in-breed crypto. It simply has too much momentum, too much brand value and too many heavy hitters backing it.

If the cryptocurrency bubble bursts like it did in 2018 and Bitcoin prices never get back to their 2021 highs, I wouldn’t be surprised. But if Bitcoin drops 80%, I’d be willing to bet Dogecoin will get hit even harder.

Dogecoin co-founder Billy Markus is very open about the fact that he created it as a joke.

“I’m half detached, but it’s weird that something I made in a few hours is now part of internet culture,” he says.

When there’s free stimulus money flowing everywhere and no concerts, sporting events or nightclubs to spend money on, I get why people are throwing their money into a joke. It’s mostly gambling, partly boredom, partly trolling and partly a statement to the establishment. But none of those reasons are compelling long-term investment theses.

Bitcoin Vs. Dogecoin

When the idea of going long Bitcoin/short Dogecoin came to me, I knew I wasn’t the only one thinking it. Dogecoin is due for a massive pullback in the near-term just on profit taking alone. Doge is up 302% in the past month compared to a 5.4% drop by Bitcoin and only a 33% gain by Ethereum (CCC:ETC-USD) in that time.

“I look at Dogecoin as more of a speculative play that when this bubble bursts it will probably cease to exist,” KeyAdvisors Group’s Eddie Ghabour says.

“In regards to crypto, Ethereum and Bitcoin are the two that I think will last.”

How To Play It

Investors can go long Bitcoin by buying it directly or investing in the Grayscale Bitcoin Trust (OTCMKTS:GBTC). Shorting Dogecoin is a bit more of a challenge. There is a 3x leveraged short coin called Dogebear that trades on the cryptocurrency exchange FTX.

However, Dogecoin investors can essentially implement this by simply selling a portion of their DOGE and buying Bitcoin with it. You would be essentially maintaining your net long exposure to cryptocurrency but betting that Bitcoin will outperform Dogecoin moving forward.

As I said, I get it. Seeing the Boomers and even the Bitcoiners rage over Dogecoin on social media is hilarious. But how long will the same joke be funny before it gets stale?

On the date of publication, Wayne Duggan did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.

Wayne Duggan has been a U.S. News & World Report Investing contributor since 2016 and is a staff writer at Benzinga, where he has written more than 7,000 articles. Mr. Duggan is the author of the book “Beating Wall Street With Common Sense,” which focuses on investing psychology and practical strategies to outperform the stock market. 

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