Who would have thought that a comical dog-themed, meme-oriented, cryptocurrency would become the talk of the town? Welcome to 2021.
I certainly didn’t think Doge would materialize into anything. Boy, was I ever wrong!
I blew it big time. Bought Dogecoin at fractions of a penny, doubled my money, and sold out early, thinking I had beat the system. I then bought back in again and sold out when I doubled my money again, thinking that I had made a quick buck. I saw it as a gamble — equivalent to putting down a couple hundred bucks on a boxing fight on a Saturday night — and not as an investment.
I made decent money off the trade but, had I “hodled”, my measly principal investment would be worth hundreds of thousands of dollars and potentially millions.
DISCLAIMER: THIS BLOG IS FOR EDUCATIONAL PURPOSES ONLY AND IS NOT TO BE TAKEN AS INVESTMENT ADVICE OR AN OFFER TO BUY OR SELL SECURITIES.
Apart from kicking myself at missing out on one of the most inexplicably spectacular and ridiculously irrational investments of generation, my Doge experience taught me a lot about investing.
Valuations are Irrelevant in When the Federal Reserve Backstops the Market
Let’s face it: central banking policy is the main driver behind the stock market’s resurgence following the March 2020 crash. The unified approach across G20 countries to keep interest rates artificially lower by treasury (and, in some cases, corporate) bond purchases has led to an unprecedented rise in prices across all asset classes.
While the bond market is the most obvious and direct beneficiary of the Federal Reserve’s strategy, the stock market followed in lock-step. We’ve witnessed a return to all-time highs in record time, with the S&P rising from a trough of ~2,500 in April 2020 back to pre-pandemic levels of 3,300 in August. The S&P now sits north of 4,200 — higher than we’ve ever seen it.
These all-time highs have given retail investors an elevated sense of confidence in their own abilities as momentum traders, who can time the market. Based on their limited trading experience, they see all the gains they’ve made since the market bottomed in March 2020 as being a result of their superior trading ability. In reality, however, if valuations no longer matter, then timing doesn’t matter either and — especially when stocks have (generally speaking) risen consistently from March 2020 onward (with a few notable hiccups here and there — every trade looks like a home run. There’s no need to time anything if the market goes up.
And, while we’re starting to see markets come back down to reality over the last few months as inflation scares begin to bring out the bears, many investors have made speculative bets on stocks and cryptos operating under the (flawed) assumption that they will only go up in value as well.
Dogecoin is yet another example of this with the movements it has seen and the benefits it has had from investors rotating away from high-growth, high multiple tech stocks into other pockets of the market.
In the case of Dogecoin, what is most spectacular is the fact that it is based entirely on the premise that its very existence is a joke! It has no revolutionary technological underpinning like Ethereum, which would give it credence as an emergent blockchain tool; it is extremely volatile and, therefore, serves no purpose as a store of value or currency in the traditional sense; and, perhaps most importantly, it has no intrinsic value. If there ever was an asset class where valuations didn’t matter it would be these so-called “alt-coins” (or, “shit coins” as some pejoratively refer to them).
So why then do people “invest” in things like Doge?
Finfluencers have Completely Dismantled the Efficient Market Hypothesis
One economic theory in particular seems very much out of synch with reality at the present moment is the efficient market hypothesis.
Developed by economist Eugene Fama in the 1970s, the theory suggests that it is impossible to consistently outperform the market because all public information is reflected in a stock’s price already. In other words, you can’t “outsmart” the market because all that is known is already factored into it.
With respects to Fama, he likely did not picture a future where “finfluencers” promote digital currencies named after a dog meme. These finfluencers include the likes of Elon Musk, Mark Cuban, and Chamath Palihapitiya —all of whom are successful billionaire entrepreneurs and investors — as well as non-financial folk like celebrities and other famous people.
Finfluencers have used social media to promote Dogecoin and, given their massive followings, have spurred speculation into the cryptocurrency itself. In some cases, these finfluencers have even gone on national television to promote Doge (cf. Mark Cuban on Ellen).
The efficient market hypothesis does not account for situations where an asset class moves based not on fundamentals or rumor about future earnings or valuation but on innocuous references on social media by wealthy and influential people.
Their very mention of the currency has sent its price skyrocketing and has also had the opposite effect. Elon’s recent appearance on SNL is a prime example. The price of Doge rallied to all-time highs ahead of the episode’s airing but plunged thereafter. And, most recently, Elon’s tweets about whether Doge should be accepted as a method of currency for purchasing Teslas was also a market-moving tweet. Elon then shocked everyone when he put out a tweet saying that Tesla would no longer be accepting Bitcoin due to the environmental impact of crypto mining, sending all cryptocurrencies crashing.
Investors have no way of preparing themselves for the vicissitudes of people like Elon and no form of recourse either. Seeing as crypto is currently an unregulated asset class, there is no regulator like the SEC to investigate this activity. If these finfluencers were to do what they’ve been doing with stocks, the SEC would have jurisdiction to investigate them over pump-and-dump schemes or market manipulation. With crypto — and especially with Doge — this authority does not exist…yet.
The new SEC Chairman, Gary Genlser, is taking an active stance in confronting the crypto mania. He has repeatedly stated that more investor protections are needed to protect against fraudulent schemes. He believes that cryptos function like securities and, if classifed as such, will fall under the SEC’s purview.
Summing it All Up
Everything I had learned about investing over the course of my life and through business school was proven wrong with Dogecoin.
Forget diversification or dollar cost averaging, to be a successful Doge investor requires nothing of the sort.
You’re better off taking the approach that compulsive gamblers take. Yes, understanding odds and spreads might help you at times, but what seems to be most important when “investing” in Doge is being dialed into the meme world of social media. You have to throw everything you learned about valuation and about market theory to the side and, instead, glue yourself to Twitter to follow the activity of a handful of influential people and speculate as to which way the wind will blow.
It’s hilarious how a joke like Dogecoin made a joke out of everything I knew to be true!