Should I invest in Dogecoin?
11.05.2021 | 6 min read
If you’re a fan of crypto, you will have likely followed the meteoric rise of Dogecoin in the news over the past few months. The meme-based rival to bitcoin which started as a joke, has risen by more than 200,000% over the past year and continues to grow in popularity. Experts have said that Dogecoin has ‘seriously strong fundamentals’ and that its importance should not be ignored. We take a look at how Dogecoin started, the benefits of investing, and the important risks to watch out for.
Dogecoin is a cryptocurrency that started out as a parody back in 2013. It features the face of the Shiba Inu dog from the "Doge"meme as its logo and namesake. Its aim initially was to create a peer-to-peer currency that could reach a broader audience than Bitcoin. It has since gained a host of well known supporters and investors, including - most notably - Elon Musk.
How does Dogecoin work?
Dogecoin is an altcoin and has many users. As well as traditional usage, there are many mainstream commercial applications including the social-media based tipping system in which Dogecoins are given for the production of interesting content.
Dogecoin is part of the DeFi infrastructure which cuts out middle-men such as brokerages or banks from transactions and instead use Smart Contracts, automated enforceable agreements.
The Ren Project has allowed Dogecoin to be used on the ethereum blockchain and to access the DeFI network.
Why has Dogecoin’s popularity skyrocketed?
Elon Musk’s support has been a big driver of Dogecoin’s growth. Since the start of the year, the billionaire boss of Tesla has been tweeting about crypto. Many of his cryptic messages have only mentioned the word dog, or included the logo, but he has also tweeted an informational short film entitled, ‘D is for Dogecoin’. All of this activity has caused a frenzy of new investors, including the likes of Snoop Dogg and Soulja Boy.
In addition, several new venues, such as crypto exchange Gemini and trading platform eToro have made Dogecoin available, further adding to its availability. As Marketwatch reports, “Some crypto participants speculate that the rise in dogecoin is being supported by retail traders who see the parody coin as more accessible investment (or trade) than, say, bitcoin BTCUSD, 2.67%, which was changing hands at $55,000, at last check on CoinDesk.” The bottom line - popularity is driven by FOMO.
What are the benefits of jumping on the Doge-wagon?
The Galaxy Digital Research report—titled Dogecoin: The Most Honest Sh*tcoin, states that "Dogecoin has powerful forces supporting its rise: a genuine origin story, longevity, and a growing community of users who appear determined to meme a Shiba Inu-themed global currency into existence." This in itself highlights the likelihood that Dogecoin will form part of the cryptocurrency story in the long run.
Aside from this, there are a number of additional benefits:
Faster transactions - On average Dogecoins take just under a minute to send, which is faster than a bitcoin transaction which takes up to 10 minutes.
Very low transaction fees - Dogecoin transactions start at just $0.0075, which is considerably lower than Bitcoin.
Difficult to hijack - Dogecoin uses scrypt, a hash technology which is entirely separate from Bitcoin’s mining process. In practice, this means that Bitcoin miners can’t hijack the Dogecoin network and hike up the spend.
No caps on coin minting - Dogecoin has no cap on how many coins will be minted. It will essentially go on creating new coins forever—making it more akin to currencies issued central banks. This decision was written into the system’s original code. This makes the coin better for tipping and keeps the price down.
Increased security - Dogecoin has merged with Litecoin, which has meant that both blockchains have become more secure.
A supportive community - As already mentioned above, Dogecoin is backed by an active, growing and supportive community, which is also engaged in charitable activity. The Dogecoin Foundation provides incentives for developers to work on projects that will enhance the experience of using the coin as chosen and voted on by the community.
What should you watch out for with Dogecoin?
As with most trends which experience a fast rise in popularity, there are a number of risks involved. Here’s what you should be mindful of if you’re looking to invest.
The hype might not be sustained - Dogecoin’s current value of $0.6 is not sustainable for a project that has no long-term plan whatsoever. The above-mentioned benefit of their being no cap on minted coins, also means that there will be a time when supply will outweigh demand. Only last weekend, Dogecoin crashed by over a third during the airing of Saturday Night Live, when Elon Musk referred to the cryptocurrency as ‘hustle.’
Minimal utility - Unlike bitcoin and other crypto assets, Dogecoin still serves a very niche market and this is unlikely to change in the immediate future. At present, only around 1,000 businesses accept dogecoin transactions.
Lack of long-term appeal - Aside from the social media hype fuelled by celebrities such as Elon Musk, there’s no underlying reason to invest in Dogecoin, particularly if you consider yourself a serious, long-term investor. For a start, there are no publicly trading companies currently investing in Dogecoin.
Garrick Hileman, head of research at blockchain.com says: “Dogecoin could as easily lose 90% of its value. I do worry about all the attention paid to a cryptocurrency that historically has not seen real-world traction.”
No technological innovation - When it comes to technology, Dogecoin brings little to the table. Even its creators have admitted that it is essentially a copy of bitcoin’s code. Therefore Dogecoin arguably lacks the exciting features to gain broader traction.
An incredible rise - but what does the future hold?
Dogecoin has certainly been on an incredible journey from a meme-based start-up rival to bitcoin, to a powerful currency whose community donates $100,000 to charities. In the latest news, Elon Musk has said his rocket company SpaceX will now accept dogecoin as payment. He also announced in a tweet that the commercial space exploration firm will launch the "DOGE-1 Mission to the Moon" early next year.
But can dogecoin's growth and success be sustained? We will have to wait and see.