Something called dogecoin is the latest cryptocurrency fad, and a familiar crowd is behind the push. Is it worth investors’ attention?
Tuesday was Doge Day in America. Didn’t you know? What – you weren’t familiar with an online forum event celebrating a digital currency originally intended as a joke but now one of the hottest commodities in the investment world? You’re not alone. Few had heard of dogecoin until it started making Wall Street Journal headlines in recent weeks.
What is dogecoin (DOGE-USD) exactly? In a nutshell, it’s like Bitcoin for dogs. Okay, not really. But it is a cryptocurrency, like Bitcoin or Ethereum, and it was originally created as a parody of those two digital currencies; it has a capital ‘D’ overlaying a dog’s head.
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Created in 2013 by software engineers Billy Marcus and Jackson Palmer, the spoof coin was a good-natured jab at Bitcoin. Until this year, dogecoin was never worth more than a penny. Now it’s worth 31 cents. Here’s what that looks like on a one-year chart:
Why the sudden spike in what for the entirety of its seven-year existence had been an essentially worthless “currency”? One word: Reddit.
Look at when the first big gap up occurred—in late January and early February, the same time users of Reddit’s WallStreetBets message board drove GameStop (GME), AMC Entertainment (AMC), BlackBerry (BB) and other left-for-dead stocks into the stratosphere almost literally overnight. Like those downtrodden companies, dogecoin gained cult status among the Reddit crowd, who relish sticking it to Wall Street’s fat-cat short sellers by rescuing broken things via short squeezes that were heretofore unprecedented among retail investors.
But the dogecoin rally is something different. No one was shorting dogecoin. I doubt most hedge funds knew what it was. Its own founders never intended it to be taken seriously. But Reddit users almost single-handedly created a market for it, and now it’s up more than 8,000% this year.
Where Dogecoin Goes from Here
Will it last? Almost certainly not. The rallies in GameStop, AMC Entertainment and BlackBerry came to a screeching halt, and those are real companies with real revenues, management teams and business plans. And unlike Bitcoin or Ethereum, dogecoin is not a digital currency that people are actually using to pay for things in the real world.
Still, the dogecoin rally probably isn’t over yet. Despite prices actually falling about half a penny on “Doge Day,” I wouldn’t underestimate the power of the Reddit mob in the short term. Users of Reddit’s SatoshiStreetBets chat forum seem hellbent on driving dogecoin prices up to $1.00. Given their short-term success in driving up GME and others to multi-year highs, it’s possible their efforts will work again, at least for a day or two.
So, if you’re a trader, you may not have completely missed the boat on dogecoin. It’s possible prices will be even higher a week from now. Ten days ago, it was worth a mere 7 cents.
But we’re investors here at Cabot, not traders. If you’re reading this, chances are you’re an investor too. And if that’s the case, I recommend steering far clear of dogecoin, just like we recommended not touching GME, AMC, BB, etc. with an 11-foot pole back in February. Trying to trade along with the Reddit crowd is pure gambling.
Crypto Trend Here to Stay
But the dogecoin craze is the latest evidence of two very powerful new trends: one, the rise of younger, retail investors looking for “bargains;” and two, the increasingly ravenous appetite for all things cryptocurrency.
Five years ago, one Bitcoin was worth just over $100. Today, it’s worth more than $56,000.
Granted, there were fits and starts along the way; after topping out around $19,000 in late 2017, prices crashed to as low as $3,200 by December 2018. People, including yours truly, had written off Bitcoin as a gimmick with no real utility whose 15 minutes of fame had come and gone. I was wrong. While Bitcoin prices may not remain as astronomical as they are today, it’s clear that Bitcoin – and digital currencies as a whole – are here to stay. Look no further than China’s efforts to introduce a digital yuan as early as next year.
Today, dogecoin is the latest metamorphosis of the cryptocurrency rush. Tomorrow, it may be some other currency you’ve never heard of. You don’t need to jump at every crypto spin-off that surfaces. But it makes sense to invest in the companies that are benefitting from the rollout of digital currencies around the world; these crypto ETFs could be a good place to start.
By summer, dogecoin will likely be yesterday’s news. But cryptocurrency is an accelerating trend you’ll be able to profit from for years to come.
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