Popular meme coin Dogecoin (CRYPTO: DOGE) has been a good or bad investment, depending on when you bought it. The cryptocurrency is remarkably up over 28,000% over its lifetime but is down more than 80% from its peak in 2021. Yet, had you bought Dogecoin a year ago, you’d be up over 60% today. In other words, Dogecoin might be the most volatile thing you could invest money in.
Given Dogecoin’s huge swings, who am I to say that it can’t make investors rich? However, just because something is possible doesn’t mean it’s likely.
Dogecoin’s impressive lifetime returns can seduce risk-seeking investors, but this is an illusion you should avoid.
Here is what you need to know.
Dogecoin is too volatile
Generally speaking, the more risk you take, the more potential reward you get. After all, if life-changing investment returns were easy, everyone would do it. Theoretically, investors looking for significant returns should be comfortable taking on some risk, traveling the bumpier road in pursuit of a better destination. But Dogecoin takes this to an extreme that most people probably can’t tolerate.
You can see below that Dogecoin has spent most of its existence trading between 40% and 80% below its all-time highs:
Perhaps the most brutal truth is that Dogecoin doesn’t have intrinsic value. Unlike stocks, it has no underlying business or assets that might justify someone paying a higher price. Dogecoin’s price depends on how much people want it versus its availability. Dogecoin could easily go forever without sniffing its former high again.
The 2021 peak is unlikely to repeat itself
Why might Dogecoin never reach its highs again? It boils down to two problems with the cryptocurrency itself.
First, Dogecoin is a meme coin created as a lighthearted way for people to learn how cryptocurrencies work. Some merchants have adopted Dogecoin as a form of payment, but it’s minimal. It would be hard for enough people to take Dogecoin seriously enough to accumulate it without more widespread adoption. Additionally, the meme coin’s intense volatility makes it harder to adopt since almost all companies sell goods and services with costs denominated in fiat currency.
Second, and perhaps the more significant challenge, is Dogecoin’s ever-increasing supply. Society uses the U.S. dollar to buy goods and services, but the dollar itself decreases in value as the Federal Reserve adds more dollars to the economy. In other words, it takes more dollars to buy the same goods or services. That’s how inflation works.
Dogecoin miners create approximately five billion DOGE annually, and there is no supply cap. So, even if everyone adopted Dogecoin, the cryptocurrency’s value would theoretically decline over time due to inflation. Dogecoin’s growing supply and limited uses essentially push its price downward.
What about 2021? Pandemic stimulus money and zero percent interest rates created a bubble across riskier assets in 2021. This bubble temporarily surged demand for Dogecoin, propelling it to the prices investors are still chasing today. Investors probably shouldn’t buy Dogecoin, hoping it will happen again.
Buy this cryptocurrency instead of Dogecoin
Dogecoin is a fun idea but is not a wise investment beyond its novelty value. The meme coin has technically generated stellar returns, but it’s like the lottery. Just because someone wins doesn’t make it wise to play.
Unlike Dogecoin, Bitcoin is anti-inflationary. The supply is capped at 21 million bitcoins and grows more slowly after each Bitcoin halving. It’s the most prominent cryptocurrency and is steadily gaining momentum in society. Numerous merchants accept it, and some companies hold it on their balance sheets. Institutional investors have begun launching more Bitcoin funds, too.
These differences have been reflected in Bitcoin’s performance versus Dogecoin since the 2021 peak:
Investors should consider all cryptocurrencies speculative investments and hold them in diversified portfolios. However, they aren’t created equally. Investors looking for cryptocurrency exposure in their portfolio should consider Bitcoin instead.
Should you invest $1,000 in Dogecoin right now?
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Justin Pope has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bitcoin. The Motley Fool has a disclosure policy.
Is Dogecoin a Millionaire Maker? was originally published by The Motley Fool
