Long-term Dogecoin investors might be feeling a sense of déjà vu as the meme token trends lower once again.
Dogecoin (DOGE -0.70%) was created in 2013 by two friends who felt the cryptocurrency industry was taking itself too seriously. They used the “Doge” internet meme as inspiration, and they said the entire endeavor was meant as a joke. However, little did they know Dogecoin would become one of the most valuable cryptocurrencies in the world in 2021, and it has taken investors on a rollercoaster ride ever since. Here’s a brief timeline of recent events:
It’s impossible to pin down the true value of a speculative cryptocurrency, but this is the most favorable political and regulatory environment the industry has ever seen. In theory, there hasn’t been a better time for Dogecoin to find a new use case, so should investors buy it while it’s trading below its 52-week high of $0.47?
Cryptocurrencies were once touted as a viable alternative to traditional money, mainly because of their portability (they can be transferred to anyone, anywhere practically instantly). But in many cases, their extreme volatility has prevented mass adoption. A currency that soars in value by thousands of percentage points — and then loses 90% of that value in the space of a year — would make cash flow management impossible for businesses.
As a result, just 2,092 merchants worldwide are willing to accept Dogecoin as payment for goods and services, according to crypto directory Cryptwerk. If consumers can’t spend their tokens with their favorite retailers, then they have no incentive to own any, so there isn’t much demand from that perspective, either.
Bitcoin (BTC 1.19%), which is the world’s largest cryptocurrency, has found a source of demand in the investment community. It’s considered a legitimate store of value because of its decentralized nature, and its capped supply of 21 million coins creates the perception of scarcity. Plus, because Bitcoin continues to set new highs, its reputation as a reliable store of value has become somewhat of a self-fulfilling prophecy.
Although Dogecoin is decentralized, it doesn’t have the benefit of a capped supply. It also hasn’t come close to setting a new high in more than four years, so it’s no surprise long-term investors might be steering clear.
Let’s focus on Dogecoin’s uncapped supply for a moment. As is the case with Bitcoin, investors can earn Dogecoin through a process called mining, which involves using computers to solve complex mathematical problems to verify transactions on the blockchain. However, unlike Bitcoin, Dogecoin technically has an endless supply.
There are currently 151 billion Dogecoin tokens in circulation, and although there is a cap on how many can be mined each year, there is no end date. In other words, new tokens will enter circulation until the end of time, and I’ve yet to find an asset with an unlimited supply that consistently increases in value.
Even if developers come up with a new use case to drive demand, investors will have to fight an endless tide of dilution forever. Their positions will be worth a little less every time new tokens hit the market.
It’s unlikely that friendly government policies and reduced regulation can solve Dogecoin’s structural problems, which probably explains why the token is trending lower once again. But where is the bottom?
As I mentioned at the top, Dogecoin declined to as low as $0.05 in 2022, so if history repeats, the token could slide by another 77% from its current level. I’m not suggesting that will happen, but it appears to be the path of least resistance in the absence of a truly bullish development.
As a result, I wouldn’t rush to buy Dogecoin just because it’s trading at a discount to its 52-week high. This is an example where a low price doesn’t mean cheap.
