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Is Dogecoin as Dodgy as Elon Musk?

There isn't anything particularly unique about dogecoin. Like bitcoin and other so-called `payment’ coins dogecoin has no fundamental economic value. But the vast majority of crypto assets do have a very real value, one that depends on the success of a company, typically in the decentralised finance or gaming space. As the value of the company increases, so does the value of their crypto asset.

Right now, dogecoin’s price is boosted by its RRR (retail-rebel-reddit) following: it costs so little, that retail investors can hold a lot of dogecoins; it has also taken over the `rebel’ role that bitcoin used to have (two fingers up to the establishment); and it has the backing of the same reddit forces that took on the big institutional investors with GameStop, who coordinate buying after Elon Musk blows the start whistle.

It is a low-cost, high-risk investment with the potential for massive returns – which can't be found elsewhere at the moment. Even high-risk junk bonds have virtually no returns now. The yield in capital markets has been over-farmed for too long. Yield-seeking investors need to turn elsewhere – and the opportunity for yield farming is just everywhere in crypto.

What makes dogecoin so remarkable right now is its price relative to bitcoin. From 1 January to the market top on 19 April, dogecoin was about 35X up against bitcoin and 70X up against the USD dollar; 1$ of dogecoin on 1 Jan could have been cashed in for 70$ on 19 April (and its market price at the time of writing is still about 60$). By contrast, bitcoin only doubled in price during that period.

It is difficult to know what Musk is up to with his dogecoin tweets. I suspect he’s having a joke with his friends, flexing his power muscles. He appears to get a kick about the control he has over financial markets. He is, of course, entitled to do this, I don't see it as irresponsible because dogecoin is still such small fry. If he tried to do the same with bitcoin, the larger investor community would not tolerate it. But Musk is wrong to think that dogecoin is the currency of the internet. It cannot be that in any real sense.

Ether (and other platform coins like dot, iota, cardano etc.) are the currency of the internet. Ether is the first mover and constant upgrades make it the obvious king. You see, anyone who wants to put anything on web 3.0 needs a smart contract on a blockchain, which requires fuel to run. Ether call this fuel ‘gas’ and gas is denominated in ether. By contrast, bitcoin has become the crypto numeraire: just as the US dollar is the unit of trade in traditional markets, bitcoin has become the unit of account in crypto markets. There are two reasons why: first, bitcoin is accepted as payment by many large companies and those operating on the dark web, and it is held in vast quantities by huge mining-pool conglomerates. These players need to hedge their bitcoin exposure and they can do this – better than for any other crypto – on a growing number of (largely unregulated) derivatives exchanges. Dogecoin does not have the potential to take either of these roles.

I think dogecoin might continue a (very bumpy) rise in price and during this time I really hope it recovers its origins. Dogecoin's founders set it up as a joke and used the money they gained for benevolent reasons, e.g. funding $25,000 for the Canadian bobsleigh team to compete in the Olympics and $50,000 for a water project in Nigeria. But since Musk took the leading role for dogecoin in 2017, he has just seen it as a game. If he wants dogecoin to have any fundamental economic value, he needs to direct it back towards its benevolent grass roots.

Carol Alexander, 29 April 2021

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