Is Dogecoin A Good Investment? Expert Suggests Avoiding Controversial Cryptocurrency Market
(CBS Detroit) -- Dogecoin started as a joke, but it is real money now. At least the meme cryptocurrency is worth real money. Exactly how much real money varies from day to day, or even hour to hour. The cryptocurrency started 2021 valued at a penny, and peaked in early May at $.74. Currently the sixth biggest cryptocurrency in terms of market capitalization (the market value of all the Dogecoin available), it closed Thursday at $.40. Trading most days is fairly volatile.
What Is Dogecoin?
Dogecoin is a kind of cryptocurrency, like Bitcoin, Etherium and many others. According to David Kirsch, Associate Professor of Management and Entrepreneurship for the University of Maryland's Robert H. Smith School of Business, "cryptocurrencies are basically pieces of software that are algorithmically controlled or algorithmically defined. And the functioning of the algorithm establishes value for the holder of the code. There's fiat currency, and then there's math currency. With fiat currency, a state establishes something, and says this token, this shell, or piece of paper has value because we say so. And cryptocurrency is basically a different way of establishing an item of value that can be exchanged electronically."
"The value accrues," Kirsch continues, "because people have confidence that they'll be able to use the little piece of software that establishes their kind of ownership to exchange it with somebody else for something of value. That it's kind of [a] standardized way of exchanging this piece of code, which is exclusive and difficult to replicate and secure."
As for Dogecoin specifically, the website describes it as "an open source peer-to-peer digital currency." Like many other cryptocurrencies, it is supported by an online community of people who can use it to pay for things in the online world. Most physical stores don't take Dogecoin as payment. In fact, only about 1,300 businesses have come to accept this cryptocurrency as payment since its inception. But, in March, the Dallas Mavericks started allowing it as payment for tickets and merchandise. Dogecoin was recently used to buy a plot of land in Rhode Island. And Geometric Energy Corporation is paying the Elon Musk-owned company SpaceX in the cryptocurrency to launch a satellite to the moon.
Of course, Dogecoin holders can exchange it for dollars on the open market, which can then be used to buy things. And a wider community of investors has come to see it as a way to build wealth. That seems to be it's main purpose, as a tool of speculation.
"As a currency of exchange, most cryptocurrencies are relatively limited," said Kirsch. "Some people have seen them as a store of value, as a kind of investment vehicle to hold value."
Volatility makes all cryptocurrency a risky place to store money. A large drop in the value of Dogecoin translates to a large drop in the number of dollars it can be exchanged for. Of course that formula works the other way, making it an attractive option for speculation, at least for some. To make this a little more tangible, suppose someone spent $1,000 on Dogecoin when it cost a penny each. Those 100,000 Dogecoins would be worth $40,000 as of Thursday. Suppose instead someone spent $1,000 on Dogecoin in early May, when it was worth $.74 each. Those 1,351 Dogecoins would be worth about $540 as of Thursday.
Dogecoin suffers from another problem that doesn't affect many other cryptocurrencies. There is no cap to the number of Dogecoins that can exist. Bitcoin, on the other hand, will be capped at 21 million total units. About 18.7 million already exist. A potentially infinite supply of Dogecoin means each individual coin can lose value as the overall number of coins grows.
How Does Dogecoin Work?
The cryptocurrency runs on what's called "blockchain" technology. That's essentially a digital transaction book to log each exchange of the currency. The ledger is distributed across the computers of the various users, with each user possessing a complete, exact copy. Because of the decentralized and synchronized network, no single entity controls the data. That makes the digital transaction book safe.
Updates are frequent and require a lot of computing power to maintain. This is where miners come in. A miner processes the transactions and logs them in the Dogecoin blockchain known as Dogechain. More to the point, their computer uses specialized software to confirm the transactions by solving complicated math equations. The miner(s) who processes the transactions the fastest, meaning the miner(s) with the most computing power, receives some Dogecoin as payment for their efforts.
Dogecoin can also be purchased through trading apps like Robinhood and, as of Thursday, digital exchanges like Coinbase. It is kept in a digital wallet. That wallet could be offered through a digital exchange. It could also be an app on a mobile device or even a separate hard drive. The coins are secured by a password.
How Did Dogecoin Get So Popular?
Dogecoin had its origins back in 2013 as a prank that everyone took seriously. According to the story, Jackson Palmer, a marketing professional for a tech company, Tweeted about a made-up cryptocurrency called "Dogecoin." The name he created used a popular internet meme of the time (a picture of a Shiba Inu onto which people pasted the dog's inner monolog) to poke fun at the proliferation of Bitcoin knockoffs. Given the cryptocurrency craze, the tweet attracted lots of attention.
A software engineer named Billy Markus used the source code from Bitcoin to put together the code for the Dogecoin cryptocurrency. And when he set it live, Dogecoin took off. It bounced around various internet threads and gained popularity on Reddit as a way to tip people to say thanks. A community grew around the cryptocurrency, using it as a charitable way to create a little more good in the world. They supported the 2014 Jamaican bobsled team as well as multiple NASCAR drivers. But soon the monetary value of Dogecoin became the community's chief concern.
The price never topped a penny until earlier this year. In late January, with popularity boiling over on Reddit, the meme-based cryptocurrency jumped into the top 10 in terms of market capitalization. Elon Musk showed his support for Dogecoin with a Vogue-inspired Tweet.
Snoop Dogg also joined the conversation.
Devotees on Reddit's WallStreetBets forum, which launched GameStop stock into the stratosphere, sought to propel Dogecoin "to the moon" as well. Robinhood, a popular trading app among young investors, already allowed users to buy Dogecoin and other cryptocurrencies. But trading took off in the first part of the year. Approximately 9.5 million customers traded cryptocurrencies on the app in the first quarter, up from 1.7 million in the fourth quarter of 2020. The ongoing COVID pandemic is likely one of the main reasons why. With fewer outlets for spending, plus two stimulus checks since January, many Americans had more money on hand. The personal savings rate was 27.6 percent in March of 2021. Further, the stimulus portion of that savings was essentially a windfall for anyone who stayed employed during the pandemic. In other words, upwards of $2,000 per person was somewhat easier to part with than hard-earned savings.
With the internet buzzing about Dogecoin, the price soared. Trading on the cryptocurrency reached such a frenzy that it crashed trading on Robinhood in mid-April, and then again in early May. Soon after the second crash, it reached a market capitalization of over $88 billion. (For reference, oil company BP also has a market cap of around $88 billion.)
Dogecoin and other cryptocurrencies have fallen significantly since that May peak. Musk calling it a "hustle" on Saturday Night Live didn't help. But the billionaire continues to be a strong supporter, even suggesting that Tesla might accept it as payment rather than Bitcoin. That boosted the price a little.
Musk isn't the only set of deep pockets interested in cryptocurrency. The waters are filled with whales who own large stashes of Dogecoin and have incentive to manipulate the price. One person or entity owned about 28 percent of all the Dogecoin available as recently as February, which translates to billions of dollars. As of early May, 100 people or entities owned about 67 percent of the Dogecoin out there.
"Elon Musk is just a visible whale," said Kirsch. "We know there are lots of invisible whales in these markets who are actively manipulating price movements, which tells me tells me that these are not yet mature financial markets, and are instead places where small people are going to be screwed."
In early June, Coinbase opened up Dogecoin trading to its retail investors. The exchange is offering a $1.2 million giveaway in a promotion open to anyone who buys $100 of the cryptocurrency. The Coinbase announcement hasn't had a noticeable effect on the price of Dogecoin.
Is The Cryptocurrency Bubble Bursting?
Cryptocurrencies lost around $1 billion in market capitalization one day a couple weeks ago. That happened soon after China, home of the world's second-largest economy, warned banks and businesses not to transact in digital currencies. Jerome Powel, Chairman of the Federal Reserve, recently cautioned against the risks of cryptocurrencies. Transactions worth at least $10,000 will soon require the IRS to be notified.
Does this mean the bubble is bursting?
There are many indications that the answer is yes. As noted above, Bitcoin, Dogecoin and other cryptocurrencies have very limited usefulness as currency, at least in the legal sense. The major cryptocurrencies process a very small fraction of the number of transactions that Mastercard and Visa process, yet they're market value is higher than that of the two biggest credit card companies. Anybody with a little bit of coding knowledge can develop their own cryptocurrency. And anybody with a big enough Twitter megaphone can create or destroy billions of dollars of value with a couple Tweets. Scrutiny is increasing in America and abroad. With Dogecoin specifically, every new coin dilutes the value of every existing coin. The list of Dogecoin's faults -- indeed, any cryptocurrency's faults -- goes on.
But at least one bubble expert isn't so sure. "It's hard to conclude definitively this is a bubble," says Kirsch, who is also the co-author of Bubbles and Crashes: The Boom and Bust of Technological Innovation. "Because it feels to me like the entire cryptocurrency market has been part speculation and part alternative currency narrative from the start. My theory of bubbles is about narratives, about objects of speculation, about uncertainty, about novice investors. And cryptocurrency has all four of my kind of necessary elements for a bubble. So part of it is I have that theory of a bubble in mind because I wrote a book about it. I looked at a bunch of technologies where there was financial speculation and saw these elements emerge as common predictors of a financial bubble. In a way, cryptocurrency is just purely that. The kind of underlying purpose is still to be determined, outside of illegal use. So we know that cryptocurrencies, especially Bitcoin, is very popular for ransoms or cyber attacks, for drug dealing and various activities that people want to undertake without being regulated by a state entity for those activities. It feels to me much more likely than what we're seeing right now in crypto markets is a reflection of the mania that we are seeing elsewhere in society as we emerge from the pandemic."
Originally published on Thursday, May 24 at 4:39 p.m. ET.
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