Why Dogecoin is the Biggest Financial Fluke of the 21st Century

As Dogecoin reaches new all-time-highs above $0.40, and a market cap above $55 billion, millions of retail investors are FOMO-ing into the cryptocurrency, thinking it is a sound and guaranteed investment. However, this is far from the truth, and the high inflation, strong centralization, and lack of fundamentals make Dogecoin one of the least sound investments in the cryptocurrency space. 

When Dogecoin was created in 2013 by Jackson Palmer, he intended the coin to be a light-hearted joke. It stayed a simple meme in the cryptocurrency space for the better part of its existence, always staying somewhat relevant but never being seen as a true investment. However, in July 2020, the social media app TikTok began attempting to raise the price of 1 dogecoin to $1, and investors began buying it, thinking it was the next Bitcoin. This hype was only further fueled by billionaire Elon Musk constantly tweeting about Dogecoin’s promise to revolutionize the financial system. Though many saw this as an ironic joke, many more saw it as a fact, and began buying even more DOGE, leading the price to increase 18,000%.

As of today, the market capitalization of the coin is above $40 billion, nearly the same as Ford, DoorDash, and Chiptole. However, unlike the companies, which are based on revenues, fundamental value, and future prospects, the valuation of Doge is purely based on hype and speculation.

Unlike Bitcoin or Litecoin, Dogecoin has no capped number of tokens, meaning that the supply will increase by a certain percentage every year. Right now, DOGE experiences a nearly 5% inflation rate, and 10,000 coins are mined every minute. For the price to stay exactly the same over the entire year, DOGE has to increase by at least 5%, otherwise the price will drop due to the laws of supply and demand. More supply means less demand, which means less price. 

Not only is the supply constantly increasing, but the Dogecoin network is not a revolutionary payments solution. Currently, the Dogecoin network can handle 33 transactions per second. Although this is higher than Bitcoin’s 10, it is significantly less than what is ideal for a payment network, and lags behind almost every other coin in the top 10. This means that no businesses will have “Dogecoin accepted here” in their window anytime soon. And with payments being Dogecoin’s only feature, there is not much hope for the project in its current state. 

Being its own blockchain, one would think that one of Dogecoin’s strengths is the hashing power dedicated to the network. However, Dogecoin uses a consensus method that relies on merged mining with Litecoin, meaning they piggyback off of Litecoin’s miners, and miners of Litecoin receive both LTC and DOGE as a reward. Though this is a positive, as it means that the incentives of the Dogecoin network are directly tied to Litecoin, it also means that Dogecoin has no strong security of its own, and also that LTC miners have no incentive to hold their DOGE, as it it simply an added bonus to what they are already getting by mining Litecoin. 

With decentralized cryptocurrencies, one would expect that there is a somewhat fair distribution of coins, and that there aren't a few people who hold a majority of the coins. However, the opposite is true for Dogecoin: one single address holds 28% of the total supply. At any moment, this person could choose to dump all of their coins on the market, and completely crash the price. Unlike traditional markets, where someone with this level of control over a stock would be under the jurisdiction of the SEC, there would be no legal repercussions for this person if they decided to sell everything. When the top 12 addresses are considered, they hold nearly 50% of the total coins. Such a massive amount of control over the price by only a few addresses should be a scary thought for anyone holding DOGE. 

When each of Doge’s shortcomings is considered on its own, they are seen as small concerns, but a red flag for the project nonetheless. When they are all considered together, one can see why Dogecoin does not deserve their sky-high market cap and that it is based on pure hype and not true fundamentals. Even though this height could propel it to $1 if enough people believe in it and continue buying, this irrational price will eventually come crashing down, and millions of investors will be left holding near-worthless coins. 

By Lincoln Murr

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