Investing and trading are two different things. The former is usually long-term oriented, and the latter may be based on emotions. Dogecoin (CCC:DOGE-USD), has had an impressive rally so far in 2021, from less than 10 cents to about 75 cents at its peak, or an increase of 750%.
Back in mid-April 2021, I wrote an article titled “Dogecoin Is the Poster Child for an Epic Financial Bubble.” The following were my key points of that article:
- Investing in Dogecoin is like sky-diving without a parachute
- Fun Is a Reason to Speculate, Not Invest
- Cryptocurrencies: Where Is Their Value?
- Social Media Use and Social Media Trolls
- Why Dogecoin Is Moving Wildly Occasionally
In this article, I will elaborate more on the insanity of Dogecoin’s price and its bubble, and support my investment thesis about avoiding it.
Reason #1 to Avoid Doge: No Intrinsic Value
In my previous article, I wrote that “Dogecoin has no intrinsic value, its price is very easily manipulated and being another ‘meme’ investment, it is subject to great volatility. … Who wants to invest in an asset without any fundamentals to support it?”
Trying to analyze the value of Dogecoin based on the aspects that add value to cryptocurrencies, such as coin utility, scarcity, perceived project value and ability to serve as a store of value and unit of exchange, is basically impossible. There is no single argument in favor of Dogecoin.
Take, for example, Ethereum (CCC:ETH-USD). It has recently reached its all-time high of about $4,140, and while I consider it overvalued too, at least the financial idea behind it is legitimate. Decentralized finance, or DeFi, aims to use technology to remove intermediaries between parties in a financial transaction. There is value in this. Price is another thing.
Doge is made just for fun. Unfortunately, there is no other business application.
Reason #2 to Avoid Doge: Social Media
Dogecoin started as a “meme” altcoin and gained traction when Elon Musk started tweeting about it. As of May 12, 2021, Dogecoin is the fourth-most-valuable cryptocurrency based on CoinMarketCap. As Elon Musk has millions of followers, any of his tweets about Dogecoin can move its price significantly.
And Elon Musk has helped Dogecoin reach its recent all-time high of about 75 cents. However, things may start to change, and logic is finally gaining ground over extreme irrationality.
Last weekend, Elon Musk appeared on Saturday Night Live and jokingly called Dogecoin “a hustle.”
As we know, cryptocurrencies are extremely volatile. Based on that comment by Musk, Dogecoin suffered consequences. “The altcoin had surpassed 73 cents on Saturday before dropping to 46.01 cents as of 8:08 a.m. in New York Sunday, a 35% decline in 24 hours, according to pricing from CoinGecko.”
So there is a huge speculative game behind Dogecoin now. Plus, I wonder, if Elon Musk considers Dogecoin a “hustle,” why would he tweet a few hours later:
“SpaceX launching satellite Doge-1 to the moon next year
– Mission paid for in Doge
– 1st crypto in space
– 1st meme in space”
To the mooooonnn!!”
He has even posted a Dogecoin song titled “to the moon.” In the nearly two-minute video there are mentions that it “is the only cryptocurrency you should invest in,” is “the people’s currency,” “you know it’s the best,” and “in DOGE we trust.”
Seriously, after watching it I wanted to break my laptop. If this was a regulated market, the financial regulator would have imposed a huge fine on Musk for manipulating the market.
And while Musk has many billions to play with, most investors do not have all this cash. So why even spend time thinking about investing in an altcoin that is a pure bubble? And a high speculative investment? It is like entering a minefield barefoot or swimming in a sea full of sharks.
Even Mark Cuban has said that Dogecoin could reach $1, as this is a target for those investing in Dogecoin. Does this make sense? No. Is this possible? Well, based on the irrational Dogecoin prices, all scenarios are in play. If there is continued euphoria and support then this joke altcoin could move higher. Will it reach $1? I do not know. Logic says it should deflate and fall to a price near zero.
Views of Institutional Investors and Central Banks
The big central banks have a very cautious, if not a negative, attitude toward the wider cryptocurrency market. The European Central Bank (ECB) has stated that it does not want to have anything to do with cryptocurrencies, considering that they are high risk and that they are being investigated for criminal acts and money laundering.
Additionally, Bank of England Governor Andrew Bailey has been sharply negative in his statements about cryptocurrencies. Only buy cryptocurrencies if you are “prepared to lose all your money,” he said. Furthermore, he added, “I’m afraid currency and crypto are two words that don’t go together for me.”
The Only Reason to Invest in Dogecoin
If you are an investor with an investment policy toward pure speculation, have a very high-risk tolerance, are ready to lose potentially all your money and ignore the fundamentals, focusing only on the latest meme “assets” and even social media investing based on dubious picks, then Dogecoin may be something to consider speculating with.
For more rational and sophisticated investors, investing in something with zero value is insane. Dogecoin has a price that is not connected to reality. Beware of all its risks. But moreover, my advice is to avoid them. Why enter a minefield barefoot? Or swim in a sea of sharks? Is this fun? Logical?
There is a lot of speculation around Dogecoin, and it is highly manipulated. Do not fall into this trap of investing in something with no intrinsic value. Unless you want to test the Greater Fool Theory.
But at some point, this trend will end for Dogecoin, and my guess is it will end very badly.
On the date of publication, Stavros Georgiadis, CFA did not hold (either directly or indirectly) any positions in the securities mentioned in this article.
Stavros Georgiadis is a CFA charter holder, an Equity Research Analyst, and an Economist. He focuses on U.S. stocks and has his own stock market blog at thestockmarketontheinternet.com/. He has written in the past various articles for other publications and can be reached on Twitter and on LinkedIn.