Dogecoin’s Lack of Inherent Utility Is Its Biggest Liability

Dogecoin (CCC:DOGE-USD), a meme-inspired cryptocurrency, was up over 12,000% this year, reaching a high of about 73 cents, before a market crash induced by China sent it tumbling back to Earth.

A close-up shot of a Shiba Inu with a grinning face.

Source: Shutterstock

Earlier this month, the cryptocurrency that literally began as a joke neared a $100 billion market capitalization.

From that momentous high, Dogecoin has corrected substantially. It is now trading at around 32 cents after multiple failed attempts at rallying higher.

Bad News for Cryptocurrency

China outlawed financial and payment institutions from offering cryptocurrency services. The hard line on digital currencies is not new, nor is it surprising. In 2017, authorities closed local cryptocurrency exchanges and outlawed initial coin offerings, also referred to as ICOs — token sales used to finance cryptocurrency projects.

Three Chinese banking and payment industry bodies have issued a statement saying said the wild fluctuations in cryptocurrency prices “seriously violate people’s asset safety” and disrupt the “normal economic and financial order.”

As a result of this announcement, cryptocurrencies such as Bitcoin (CCC:BTC-USD) and Ether (CCC:ETH-USD) tumbled to three-and-a-half month lows, recording their biggest one-day loss since March of last year.

Many analysts believe the Chinese announcement is correlated to its own digital yuan or e-CNY, which is undergoing public testing as of April.

Nevertheless, the move was a major blow to crypto investors. To add insult to injury, on May 12, CEO Elon Musk said Tesla (NASDAQ:TSLA) was suspending vehicle purchases using Bitcoin due to environmental concerns surrounding the crypto mining process.

Dogecoin, which Musk talked up, suffered the least amount of damage. But it still suffered a steep drop. The major issue, though, is whether there is inherent value in this meme currency.

Intrinsic Issues Plaguing Dogecoin

Dogecoin will eventually regain lost ground. However, it is not the next Bitcoin. Investors who believe in this narrative are in for a rude awakening.

Bitcoin aspires to be an alternative to national currencies as a medium of exchange and a store of value. Launched in 2009 with an extremely detailed white paper written by Satoshi Nakamoto, the pseudonymous Bitcoin creator, the aim was for Bitcoin to become a leading decentralized digital currency. Investors hope it can function like gold and hedge against inflation.

Dogecoin, in comparison, started as a joke in 2013 by software engineers Billy Markus and Jackson Palmer. Based on the “Doge” meme, which portrays a Shiba Inu dog, Markus and Palmer wanted to get some laughs from their idea and did not want it to be taken seriously.

But even Markus did not foresee the support DOGE is getting. No one could have prepared him for what is happening. Recently, the cryptocurrency exploded after social media buzz from the likes of Musk and Mark Cuban.

In my previous articles about the currency, I explained how these two gentlemen helped generate a massive rally for the coin. Needless to say, the kind of stellar growth easily surpassed that of Bitcoin during this time.

But the fact remains, DOGE was “created for sillies.” Bitcoin, meanwhile, is a purpose-driven digital currency.

Bitcoin also has a finite supply of 21 million, making it valuable and a natural hedge against inflation. No such luck with Dogecoin, which is inflationary because of a potentially infinite supply.

Finally, Bitcoin has a robust ecosystem that’s lasted for 12 years, and institutional interest in that ecosystem is growing day by day.

Tough Times Ahead for Dogecoin

Despite its recent downswing, the meme-themed cryptocurrency still has legs to continue its journey to $1. However, it has become tougher after the wider crypto space has seen a correction. DOGE has support at $0.328. It dropped below that support level in the early hours of May 28 but is on the rise, so time will tell whether that support remains intact. Meanwhile, it has resistance at $0.399.

If you are still holding this coin, I will advise you to wait until the digital currency hits that level and book your profits. The long-term story for DOGE is sketchy. BTC growth from 2020 onwards is largely due to an increase in institutional investment. There is a sense of safety an investor feels when they see the smart money backing an asset. This will not change because of the market crash.

But as I mentioned earlier, this luxury does not exist for Dogecoin. Celebrity endorsements are the only reason this currency has done so well. If you look at Bitcoin or Ethereum, they both have inherent qualities that DOGE lacks.

In terms of Bitcoin’s outlook, investors took a shock to the system. But it’s not a major hurdle for Bitcoin to overcome, and it’s a small one compared to the issues and market downturns it has faced in the past.

On the date of publication, Faizan Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Faizan Farooque is a contributing author for InvestorPlace.com and numerous other financial sites. Faizan has several years of experience analyzing the stock market and was a former data journalist at S&P Global Market Intelligence. His passion is to help the average investor make more informed decisions regarding their portfolio.


Article printed from InvestorPlace Media, https://investorplace.com/2021/05/dogecoin-lack-of-inherent-utility-is-its-biggest-liability/.

©2021 InvestorPlace Media, LLC