Whenever I look at Dogecoin (CCC:DOGE-USD) or Shiba Inu (CCC:SHIB-USD), I am reminded of the nature of fiat money. The government-issued currency is not backed by gold or any other commodity. It’s just backed by the trust we have in the government.
Dogecoin, which started as a joke and is a meme coin, has no utility. It’s functioning as a digital currency and the only survival strategy is wider adoption and trust.
If we look back, it’s a series of tweets from Elon Musk that triggered the meme coin euphoria. There were some lucky holders of the meme coin who made millions.
For now, it seems that Dogecoin has completely been adopted by Elon Musk. In December 2021, Musk opined that Dogecoin is better than Bitcoin (CCC:BTC-USD) as a transactional currency. Recently, Tesla (NASDAQ:TSLA) started accepting Dogecoin for buying brand merchandise.
It’s worth noting that after a euphoric rise to 73 cents in May 2021, Dogecoin has been trending lower. Imagine a scenario where Musk declared that he does not own Dogecoin. I can say with some conviction that the meme coin would drop below 10 cents.
Clearly, it’s the Elon factor that has kept meme coins afloat. It further seems that the Tesla CEO is backing Dogecoin with some conviction.
With that view, I will not hesitate in considering some exposure to the meme coin. However, I would avoid any big plunge in Dogecoin or Shiba Inu. There are dozens of coins or tokens with a strong utility.
In general, investors look for coins that can deliver multi-fold returns. At a market capitalization of $22 billion, Dogecoin is not a multi-bagger.
Big Community Support for Dogecoin
If I had to choose one meme coin, I would go for Dogecoin over Shiba Inu. The Musk factor has already been discussed and that’s a key reason for this preference.
Furthermore, Dogecoin has a bigger community than Shiba Inu. Data indicates that the meme coin has nearly 4.8 million holders.
Over a three-month period, there has been a steady growth in the number of holders. This is important as a wider adoption will serve as a catalyst for more companies using Dogecoin as a payment method.
It’s worth noting that Shiba Inu has been trying to create a wider ecosystem. The project has initiated a decentralized exchange and also facilitates NFT trading.
Dogecoin has maintained its position as a peer-to-peer digital currency. I would look at a pure-play within the crypto space, rather than looking for projects that attempt too much diversification.
I am not suggesting that Shiba Inu is unlikely to survive. However, if I had to invest in a meme coin, I would go for Dogecoin.
It’s important to mention here that at least three to four rate hikes are expected in 2022. This will translate into a relative tightening of liquidity in the financial system. Whenever this happens, there is some outflow of funds from very-risky asset classes. This can be a potential headwind for meme coins in 2022.
However, in all probability, Dogecoin has bottomed out. I don’t expect Dogecoin to touch one dollar. But I would not be surprised if the meme coin rallies by 30% to 50% in the next 6-12 months.
It therefore makes sense to hold a small bad of Dogecoin in a diversified cryptocurrency portfolio. Overall, it would be unrealistic to expect multi-fold returns from the meme coin. However, Dogecoin might be one of the few meme coins that survives in the coming years.
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On the date of publication, Faisal Humayun did not hold (either directly or indirectly) any positions in any of the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modeling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector.