Remember the class joker? You know, the guy sitting in the back of the room with his feet on the desk, blowing bubble gum and constantly visiting the principal’s office? The cryptocurrency world has their version of this.
Dogecoin (CRYPTO:DOGE) is among the first “meme tokens” and was created as a joke by its founders Billy Markus and Jackson Palmer in 2013. It has thrived for two main reasons.
First, it was early to the game. Investors had fewer options back then, and simply being a part of the crypto environment carried a greater sense of purpose. Dogecoin’s standing as a farce invited enthusiasts to be a part of Dogecoin for reasons other than money.
Second, it’s symbol was a picture of a dog. Enough said.
The story behind Dogecoin? Suffice it to say, the founders packed up and sold their stake during one of the early rallies in DOGE, thinking the insanity had gone too far.
Of course, with recent endorsements from celebrities (namely, Tesla Chief Executive Officer Elon Musk), Dogecoin has transformed itself from a token of little real-world importance to a Top 10 cryptocurrency by market capitalization.
Let’s dive into three reasons Dogecoin may be considered a reasonable, if speculative, investment today — but also offer some cautionary notes.
1. Dogecoin’s popularity makes it so
Back to the high school analogy: If there were a crypto popularity contest, Dogecoin’s meme standing would make it a contender.
The Dogecoin sub-Reddit has 2.2 million “subshibers” (Shiba Inu subscribers) on its page. Among the most popular names that have endorsed Dogecoin are Musk and hip-hop performer Snoop Dogg.
Given the speculative nature of cryptocurrency, popularity alone is critical. As for valuation, Dogecoin is worth what it’s worth because others believe the token will increase in value. Those investing in DOGE also are banking on more headlines from celebrity hype.
Of course, the fact that Dogecoin is so popular right now is great. The return DOGE has provided investors over the past year alone is a staggering 9,000%.
However, investors are taking risks with owning a token that has skyrocketed so quickly on the basis of popularity alone. If another cryptocurrency claims the majority of investors’ attention, Dogecoin could get pushed aside.
2. Dogecoin is great for crypto novices
Dogecoin’s mountainous volatility during the past year is a deterrent to some investors. Indeed, putting any significant amount of money into something that can skyrocket or plummet in short order requires an iron stomach and the right mindset.
However, investors looking to get into the crypto game might want to consider Dogecoin as a great option.
Well, holding Dogecoin for any extended period of time can give investors a glimpse of what crypto investing is all about. Investing in cryptocurrencies requires a firm belief that a technological transformation is underway, and that crypto will soon remake the world as we know it. Yet, surges and dips driven by fickle sentiment are par for the course. Investors must be willing to weather the storms as they come.
I view Dogecoin as one of the more speculative, and therefore volatile, cryptocurrencies out there. Accordingly, those looking to go on an incredible ride may want to put a few dollars to work in Dogecoin. This cryptocurrency will undoubtedly provide a roller coaster ride that’s fun at some points, and scary at others.
Of course, investors should only invest what they’re willing to lose in such speculative assets.
3. Dogecoin’s market positioning is unique
I think Dogecoin’s mining model, inflationary status, and ties to Litecoin (CRYPTO:LTC) are all intriguing. These factors make Dogecoin unique, and an intriguing investment for many crypto enthusiasts.
Because it was an early crypto entrant, Dogecoin’s mining model is based on proof-of-work. Like Bitcoin (CRYPTO:BTC), this means complex computational problems must be solved to validate transactions across the Dogecoin blockchain.
However, given the concerns around the environmental impact of crypto mining, experts are predicting that Dogecoin will shift into a proof-of-stake validation model, in which coin holders validate transactions. Such a move may entice investors who are on the fence about older cryptocurrencies.
That said, Dogecoin reportedly uses much less energy per transaction than Bitcoin — less than 2%. Those looking at cryptocurrencies from a sustainability angle ought to like that.
Additionally, Dogecoin’s blockchain is verified via miners using the Scrypt algorithm, the same one used to mine Litecoin, a Bitcoin spinoff. Those bullish on both Dogecoin and Litecoin have reason to like this feature, which isn’t that common in the crypto mining world.
Finally, Dogecoin’s inflationary status has caused some investors concern in the past. Buying something that naturally inflates over time (its supply isn’t capped like Bitcoin’s) requires that demand exceeds the natural inflation rate. If folks start pulling out of Dogecoin en masse, or switching to the next most popular cryptocurrency, Dogecoin prices could tumble right quick.
That said, the fact that there are only 5 billion new DOGE tokens created every year means investors can closely estimate the inflation rate over time. Given the currently supply of DOGE at around 131.5 billion DOGE, this inflation rate works out to roughly 3.8% this year. Additionally, this inflation rate will decrease over time, as the denominator gets larger.
Having an idea of the capital inflows into Dogecoin can allow investors to analyze the probabilities of price appreciation. For those looking for an intellectual puzzle, Dogecoin certainly obliges.
Dogecoin is among the most speculative cryptocurrencies out there. Sure, it’s making headlines right now, but headlines have led to outperformance in recent years.
However, investors need to be aware of the risks. Buying a small stake in DOGE along with other cryptocurrencies in a well-diversified portfolio is great. Going all in, however, is not advised.
That said, this token does have upside potential. For those able to handle the volatility, this cryptocurrency may be worth a look.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.