This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
Derided by many pundits as a joke digital coin with no real path to gaining stable value, yet defended stoutly by its legion of retail investor fans, Dogecoin (CRYPTO: DOGE) has followed a roller-coaster pattern of massive price surges and dizzying plunges over the past few months. The coin with its Shiba Inu mascot image, however, has slowly gained some traction as a medium of exchange. Recently, Jenny Ta, founder of crypto-commerce site CoinLinked, asserted that its market cap could reach $1 trillion, indicating Dogecoin might eventually trade for $7 to $8.
There are indeed some positive signs for the formerly long-dormant dog-themed cryptocurrency, but the level of risk for its buyers remains high.
How Dogecoin got here
After its launch in late 2013, Dogecoin's value remained at fractions of a cent for the next seven years, while Bitcoin (CRYPTO: BTC) grew to dominate the cryptocurrency market. In 2021, however, Dogecoin has gained explosively in price with rises that included a more than 500% one-day jump on Jan. 29.
Its rise was triggered by a group of crypto enthusiasts on Reddit looking to repeat in the digital currency arena what the WallStreetBets subreddit did to the share price of GameStop. Those stock traders ignited a short squeeze in which some small investors profited by pumping up the value of GameStop, which forced institutional short-sellers to push it even higher as they covered and closed their money-losing short positions.
According to many involved, a sizable number of Redditors viewed the short sellers' behavior as artificially depressing the share prices of GameStop and other heavily-shorted companies far below their objectively reasonable valuations. Their desire to punish what they perceived as an example of "vulture capitalism" gave them additional motivation to buy and hold the stock.
Dogecoin's surge was aided by tweets from maverick electric vehicle CEO and space pioneer Elon Musk, and it was dubbed "the people's coin" or "the people's crypto" by its enthusiasts. This sparked the rapid growth of the r/dogecoin subreddit, which reached 1.9 million members by May 20. Large holders also played significant roles in the coin's rise, as well as its subsequent drops as those "whales" pumped and dumped the coin.
Where does Doge go from here?
The broader cryptocurrency market remains extremely volatile with intensely held views on both sides of the argument around the real value of such assets. Powerful, unpredictable price movements mean long-term investments in a well-chosen portfolio of traditional stocks are likely to deliver better returns for many investors, based on the standard analytical view.
However, in the process of being bought and traded, Dogecoin has acquired value and characteristics absent from its original "meme coin" incarnation. Here are some potential signs of this shift from low-value meme to potential medium of exchange:
1. It is retaining value despite the crypto roller-coaster
Cryptocurrencies in general have taken a pummeling over the past several weeks, and Dogecoin has not been immune from that trend. Its value often moved independently from Bitcoin or even the crypto market as a whole during its ascent, and its price has hovered in the $0.30 to $0.40 range for nearly a week. This stability has come despite the average size of trades and the overall trading volume dropping sharply. The average transaction value, which shot upward starting in mid-April, peaked at $1.16 million on May 23, then fell back to less than $240,000 by May 26, according to data supplied by BitInfoCharts.
That Dogecoin continues to trade far above its early 2021 price range of $0.02 or less suggests that market forces have established a "floor" at current levels, at least for the time being. The coin's worth never fell far below $0.30 during the past month, despite China's push to ban cryptocurrency mining. That decision came as a blow to Bitcoin miners in particular, since 65% of them are believed to operate in China, but the decision exerted downward pressure on the whole crypto market.
2. It has some everyday advantages over Bitcoin
Among the younger demographic that makes up the bulk of cryptocurrency enthusiasts, preserving the environment is commonly seen as a high priority.
In light of that, the vastly lower amount of electricity required to mine and use Dogecoin compared to Bitcoin could boost its attractiveness as a crypto alternative. Dogecoin uses just 0.12 kilowatt-hours of electricity per transaction, compared to Bitcoin's 707 kilowatt-hours.
Though the concept is currently little more than an upbeat prospectus, the nonprofit VeriBlock Foundation says it is working on a "proof-of-proof" blockchain technology that would reuse Bitcoin's proof-of-work security for other cryptocurrencies, including Dogecoin. If successfully deployed, the technology could greatly lower Bitcoin's relative environmental costs, while providing improved security for other cryptocurrencies, potentially helping Bitcoin and Dogecoin develop a type of symbiosis rather than a direct rivalry, benefiting holders of both.
While some view with concern the fact that there is no limit on the total number of Dogecoin that could eventually be mined -- in contrast to Bitcoin, which does have a hard cap -- a maximum of 5.26 billion additional Dogecoin tokens can be mined per year. With over 129 billion coins already in circulation, this capped mining rate ensures Dogecoin's inflation rate will decline steadily over time, while still providing an incentive to continue mining it.
The total number of Dogecoin in circulation will rise by 4.1% in 2021, but only 3.9% in 2022. Dogecoin inflation will be 3.5% in 2025, 3.0% by 2030, 2.3% by 2040, and 1.9% by 2048. Given the attrition from lost Dogecoin wallets -- a factor in the supply of all cryptocurrencies -- the coin could theoretically become deflationary at some point if those losses exceed the ever-shrinking inflation provided via mining.
In short, while Dogecoin is theoretically "infinitely inflationary," its predictably declining, mathematically inevitable inflation rate potentially gives it more a stable value than national currencies.
3. It's gradually winning wider acceptance
Like any currency, Dogecoin gains value as it becomes more widely accepted as a medium of exchange. While dozens of small businesses now accept Dogecoin as a form of payment, their economic impact is effectively zero. However, some larger entities are also accepting Doge, including the NBA's Dallas Mavericks, which will let customers use it to buy both tickets and merchandise through BitPay.
As team owner Mark Cuban stated: "The Mavericks have decided to accept Dogecoin as payment for Mavs tickets and merchandise for one very important, earth shattering reason, because we can!" The team's press release offered some more practical reasons for the decision, noting that the "ability to accept crypto expands a business' sales opportunity into international markets where accepting credit cards is not practical while reducing high fees and increasing payment transparency and efficiency." The Houston Rockets are also accepting Dogecoin, among other cryptocurrencies.
It is now also possible to purchase the hardest of hard assets, precious metals, using Dogecoin. The largest U.S. silver and gold e-commerce site, JM Bullion, added it to the list of seven cryptocurrencies it accepts as payment. Under JM Bullion's policy, buyers using cryptocurrencies receive a 3% discount on their transactions compared to credit card purchases, close to the 4% discount it offers to purchasers who pay via personal check.
Rumors also continue to swirl that so-called "DogeFather" Elon Musk might start accepting the cryptocurrency for purchases of Tesla vehicles. The electric car manufacturer has stopped accepting Bitcoin payments due to the coin's adverse environmental impact, but Musk continues to offer verbal support for Dogecoin. However, with Musk now signaling that he'd be willing to reverse his Bitcoin rejection if miners commit to "going green," Tesla's future stance on Dogecoin remains cloudy.
Choosing a 'diamond hands' or 'paper hands' strategy
Though it was born as a "joke coin," Dogecoin now enjoys a number of potentially bullish factors, making it less simple to dismiss as an asset. The risk to investors remains high, as it does with all "altcoins," but Dogecoin's low energy costs, a potential for a shared security protocol with Bitcoin, the willingness of a few larger companies to accept it for purchases (and the possibility that more will join them), and a measure of price stability are positive signs overall. Though not directly measurable, Dogecoin also may benefit from the considerable good will of its two million strong retail investor "fan base."
Fools investing in cryptocurrencies should not put any money into Dogecoin that they are not prepared to lose. Those who already have positions in it may want to get out if they aren't comfortable with volatile, high-risk investments -- be "paper hands" in the parlance of Reddit retail investors. But if you are prepared to hold cryptocurrencies through dips and fluctuations -- adopting the unshakable "diamond hands" strategy -- then over the medium to longer term, "joke" currency Dogecoin has at least some potential to leave you laughing all the way to the bank.
This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
