Up until early this month, anyone bullish on Dogecoin (CCC:DOGE-USD), no matter the price, was laughing all the way to the bank. But, for the past week, things have turned on a dime. Since May 8, the meme-driven crypto has lost around a third of its value. And its biggest advocate is the one to blame.
I’m talking about Elon Musk, who helped to give this “jokecoin” substantial social proof, fueling its rise from less than a penny to prices just under 74 cents. As you may know, Musk’s candid remarks about Dogecoin on Saturday Night Live kicked off a wave of panic selling in the hours following the show’s airing.
At first, it partially recovered. But, Musk again added fuel to the fire. Except this time, he’s caused panic among Bitcoin (CCC:BTC-USD) “HODLers” as well. Changing his mind about accepting Bitcoins as payment for Tesla (NASDAQ:TSLA) vehicles, BTC, already under pressure, is again trading for around $50,000.
It’s too early to tell whether the recent crypto declines are only a near-term pullback, or if it’s the start of a full-on meltdown. But, with investors losing faith in crypto being a hedge against inflation, things aren’t looking good. There may be a way for this recent favorite to soften the blow if its use as a medium of exchange takes off. But other than that, expect it to give up most, if not all, of its 2021 gains over the coming weeks/months.
Why The Party May Be Over for Dogecoin and Other Cryptos
Musk’s recent statements have had an outsized role in the declines of DOGE-USD and BTC-USD in recent days. But, other developments have called into question whether this asset class is still the future of money, or if it’s merely our era’s version of the 17th Century Dutch Tulip Bubble.
Part and parcel to the bull case for cryptos is their potential to be a hedge against inflation. With the Federal Reserve’s aggressive monetary policies, it makes sense why investors are looking for alternatives to the U.S. Dollar. However, following the most recent Consumer Price Index (CPI) numbers, which showed relatively high amounts of inflation, did BTC rally?
It didn’t. Instead, the opposite happened, with BTC tanking in tandem with other risky assets. Again, it’s still early to have a definite takeaway. But, it’s starting to look like cryptos will continue to tumble, as the Fed mulls changing course with its near-zero interest rate policy. Cheap money has driven the inflated valuations of popular “story stocks,” and it appears to have played a role in the rise of cryptocurrencies since last fall.
So, what comes next? As investors lose faith in crypto being “schmuck insurance” against central banking policy, coins across the board likely have more declines ahead. That’s bad news for those long Bitcoin. And, it could be “game over” for speculators who dived into Dogecoin at or near its highs. But, admittedly, there may be one way for this “memecoin” to at least hold onto some of its value.
Can Its Adoption as a Medium of Exchange Save The Day?
Many signs are pointing for cryptos, especially Dogecoin, falling more from here. Yet, there may be something that could save the day. That’s not to say prices will find a floor where they currently trade (around 40 cents). But it may be something to prevent it falling back below a penny.
What am I referring to? The ramp-up in its use as a medium of exchange. Sure, high utility alone hasn’t been enough to keep Ethereum (CCC:ETH-USD) from falling in line with the rest of the crypto space. But if more companies start accepting DOGE as payment, even as a gimmick, it may be enough to keep it from ending up in the crypto graveyard.
That being said, it’s possible, but is it probable? So far, despite Mark Cuban’s optimism of its utility, it hasn’t become a major payment method. A few places have started to, but one of these is Cuban’s own Dallas Mavericks NBA team. As for other businesses mentioned as accepting Doge as payment? You can probably chalk many of these up as short-lived publicity stunts.
Putting it simply, the jury’s still out whether this winds up becoming a widely used alternative medium of exchange.
Bottom Line: As The Bubble Bursts, Stay Away
It may be too early to say it’s the beginning of the end for the runaway bull market in cryptocurrencies. But, it’s starting to look that way. As the hype around this altcoin fades, with little but the long-shot odds of it becoming a payment method backing it up, there’s little reason to “buy the dip” right now.
It may not go back to below a penny. But expect the Dogecoin bubble to continue bursting.
On the date of publication, Thomas Niel held long positions in Bitcoin and Ethereum. He did not hold (either directly or indirectly) any other positions in the securities mentioned in this article.
Thomas Niel, contributor for InvestorPlace.com, has been writing single-stock analysis for web-based publications since 2016.