8 cents… 10 cents… 15 cents… Dogecoin investors were suddenly awarded 100%-plus gains in under a week!
Financial orthodoxy suggests selling immediately. My years of professional training make clear that assets with 1) zero profits, 2) zero assets, and 3) zero ability to produce either in the future should be worth… well… zero.
You don’t even need to become a CFA charterholder to know that.
But Dogecoin and other meme coins are anything but normal. Instead, it’s a reflection of human emotions — the “behavioral finance” part of investing. It’s why I suggested investors buy $500 of Dogecoin in April 2021 before it embarked on a stunning 330% rise to 71 cents. And it’s also why my Profit & Protection quantitative stock-picking system has a score marked “momentum” among its four key elements. Even logical investors must concede that markets are sometimes run by illogical traders.
Today, Dogecoin prices have once again triggered a key indicator of my Momentum Master trading system.
And now, the indicator is saying “buy.”
The Indicator Predicting a Dogecoin Price Surge
Let’s be clear: I have a tortured relationship with momentum strategies. Common sense tells us that price action alone should tell us little about an asset’s underlying value. In financial theory, all public information should immediately show up in market prices.
Technical strategies also have a long history of overfitting bias — a case where algorithms find patterns where none exist. (One lighthearted site notes how the divorce rate in Maine correlates with per capita consumption of margarine).
But my research has shown that momentum strategies do work, especially in inefficient markets like commodities… real estate…
…and meme coins.
$10,000 invested in Dogecoin using my Momentum Master strategy in March 2021 would be worth $98,120 today, versus a buy-and-hold return of $29,580. In fact, the strategy has worked for every major coin since at least 2018, the year altcoins went mainstream.
That’s because prices are often a predictor of future investor sentiment. Rising prices tend to cause more buying and more optimism while declining ones can cause an irreversible “death spiral” of losses. It’s one essential reason why well-known meme coins tend to outperform lesser-known ones over long periods. And it’s why I’m so keenly noting that the Momentum Master indicator has finally turned positive on Dogecoin prices for the first time since April.
Finding the Right Strategy
There’s more to buying Dogecoin, however, than waiting for prices to go up. Simple moving averages and relative strength indices tend to create unprofitable in-and-out trades when markets move sideways, enriching brokerages and sentencing portfolios to death by a thousand cuts. Many high-frequency traders are also aware of simple strategies, making SMA and RSI easy targets for front-running.
Nor is buying Dogecoin on emotions alone a particularly good tactic. If everyone else is doing the same thing, that gives us no edge in the market.
Instead, the Momentum Master strategy uses a consistent, variable moving average that adjusts based on an asset’s volatility. The more volatile a cryptocurrency gets, the further prices have to deviate for a “buy” signal to trigger. This nuance helps avoid the common error of buying one day and getting forced out the next. When markets are moving sideways, the Momentum Master strategy widens the thresholds enough to avoid picking up false signals.
The variable strategy also helps adjust for skyrocketing prices. When values shoot up too quickly, the strategy is quick to lock in profits the moment everything starts sliding back down.
The Fed (And Elon) Lends a Hand
Dogecoin investors now also have two old allies to thank: Federal Reserve Chair Jerome Powell and Twitter CEO Elon Musk (two people I never thought I’d mention in the same sentence).
Consider the former. In October 2021, I warned investors that Powell was about to turn off the liquidity taps.
“That’s troubling news for crypto. The Federal Reserve has pumped over $4 trillion into the U.S. economy since the start of the Covid-19 pandemic, 65% more than the total market cap of all cryptocurrencies. Without that liquidity, cryptocurrencies will begin to stall.”
Today, the Fed is moving the other way. In November’s Federal Open Market Committee (FOMC) meeting, Mr. Powell suggested that the Fed would “slow our pace of rate hikes … eventually.” That’s great news for Dogecoin, an asset driven by excess liquidity. If rates start falling faster than expected, the world’s “crypto winter” will quickly thaw.
Then there’s Elon Musk, the self-proclaimed “Dogefather.” Recent tie-ups with Binance and his move into Twitter’s CEO position mean that the world’s richest man is also now one of crypto’s most influential people.
Put another way, Elon Musk is now only one tweet away from sending Dogecoin to $1.
No one, of course, should count on Mr. Musk turning Dogecoin into legal tender on Twitter. Nor should Dogecoin fans hope for more Doge-inspired endorsements from the freshly crowned social media mogul.
Nevertheless, Mr. Musk’s new position of power has analysts suggesting that “crypto could be playing a bigger role” in Twitter’s future. “Bulls see more gains ahead, given Musk’s long history with the token,” notes Jack Denton at Barron’s. “The biggest move Musk could make is buying some Bitcoin as an asset for Twitter’s corporate treasury… Musk could also boost crypto, and specifically Doge, through expanding the payments platform on Twitter to include tokens.”
Where Will Dogecoin Prices Go?
The Momentum Master strategy, of course, has its limitations. Beyond suggesting “buy” and “sell,” it makes no recommendation of where prices could eventually end up.
It’s also unclear on a fundamental level whether Dogecoin is worth anything at all. The cryptocurrency’s inefficient Proof of Work (PoW) protocol is unlikely to get upgraded to a Proof of Stake (PoS) one at current development rates, and its natural 5% annual inflation rate makes it unattractive for long-term riches.
But in the short term, the Momentum Master strategy is telling us that Dogecoin optimism is back. 20 cents… 50 cents… $1… everything’s on the table when Jerome Powell and Elon Musk are taking the lead.
I caution against overinvesting in such a speculative investment that could easily plummet to zero. But if you missed out on the fun of buying $500 of Dogecoin in 2021, the Momentum Master strategy is once again suggesting that now could be the right time for another lark.
On the date of publication, Tom Yeung 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.