The Fault in our Doge
- And why it won’t go to the stars; or the moon; or practically anywhere for its sake
Among the deluge of cryptocurrencies popping up every day, Dogecoin has had the most gala ride in the past few months. The cryptocurrency, which features the ‘Shiba Inus’ dog as its mascot, gained its market cap from $1 Bn in early January to $80 Bn in May. January and May, of the same year! That is insane!
So a basic primer first for all those who don’t know what Dogecoin is.
Dogecoin: Something that started as just a meme
Dogecoin is basically like Bitcoin (it actually is a fork of Litecoin, which is heavily adopted from Bitcoin) and like most cryptocurrencies, it enables peer-to-peer transactions on a decentralized network. The difference between the two? Bitcoin was a revolutionary technology, the original proof of work concept, based on a blockchain. Many called it the ‘disruptor of the internet’, some considered it a challenge to the global financial system, yet others considered it to be a shift of power from evil global forces to the next-door Joe and6 Jane. Bitcoin was the money of the future.
Dogecoin is just dogecoin, a digital coin, with the picture of a dog on it!
The Dogecoin has been around for much much longer than most think. It was started in 2013 by two engineers, Billy Markus from IBM and Jackson Palmer from Adobe. In their meeting they decided to combine the two phenomena that had taken the world by storm: Bitcoin and Doge, and out came the Dogecoin. Because this is what the guys do when they meet, they build random, open-source, meme-based, cryptocurrency.
The Initial Claim to Fame
The idea was to make an alternative to Bitcoin due to the massive profiteers that had gotten into mining it. Bitcoin, launched in 2008, had failed to achieve what it set out to venture. Dogecoin was expected to change that.
How?
Well, Bitcoin was limited in number, only around 21 million of those can be mined ever. Dogecoin, on the other hand, 10,000 of them can be mined every minute.
The Dogecoin was a hit amongst the crypto geeks. It was mostly used to tip online content creators due to the high speed of transactions, nominal denominations, and low cost of transaction compared to other cryptos like Bitcoin. It was dubbed as a ‘tipcoin’. It is claimed that the trading volume even surpassed the heavyweight Bitcoin for a brief period. In 2017, it crossed the $2 Bn market cap figure, after raising 50,000, USD for a Jamaican bobsled team, raising 30,000, USD for clean water in Kenya, and sponsoring a Nascar. All of this before crashing.
The Dogecoin went unnoticed for years, the original subreddit that had catapulted it to fame silenced, the founders of the coin left, and the code wasn’t even updated.
It was in March 2020 when the Doge had its moment. Serial entrepreneur and influencer Elon Musk threw his support behind Dogecoin and the community, claiming it was ‘inevitable’ and could be ‘the currency at Mars’. He was joined by several others such as Carole Baskin, a big cat rights activist, singer Gene Simmons, bodybuilder Kai Greene, former adult star Mia Khalifa, American rap star Snoop Dogg, etc.
Even with all the love and support that Dogecoin has been getting, let us walk you through the potential faults that hinder its acceptance as a currency of any form.
Founder’s Exit
The Dogecoin is a meme coin, not meant to be taken seriously. Even its founders didn’t. So much so that they abandoned the project long ago. Today merely three part-time developers manage the codebase. This has led to absolutely no tech development taking place in the Dogecoin code base since 2015.
While some view this in the ‘do not take it seriously’ vein, a poorly maintained codebase makes the Dogecoin susceptible to be dislodged by more up-to-date and modern coins. The Dogecoin may be left behind and simply replaced by some other memecoin that catches people’s fancy.
Cyber Attacks, Security Breaches, and Frauds
Due to very little codebase maintenance, Dogecoin has been hacked previously. The Doge Vault was infiltrated and close to 280 million Dogecoin, worth $55k then ($196 Mn today) were stolen along with the credit card information of hundreds of users. While the community almost immediately pooled resources to recover the stolen Doge under the banner, the official statement read this:
“It is believed the attacker gained access to the node on which Doge Vault’s virtual machines were stored, providing them with full access to our systems. It is likely our database was also exposed containing user account information; passwords were stored using a strong one-way hashing algorithm. All private keys for addresses are presumed compromised; please do not transfer any funds to Doge Vault addresses.
If you like to use Dogecoin, you should change your online account passwords and make sure to check your credit card statements frequently for fraudulent or unauthorized purchases. But let’s be serious here; we kind of hope you aren’t investing serious capital into this pseudo-currency.” (emphasis added)
That is the official statement.
In 2014 a crypto exchange called Moolah was set up in the UK to handle Dogecoin by Alex Green. Many new doge holders jumped the wagon, while Green continued using the ‘tipcoin’ to make hefty tips. He even sold shares of the exchange as Dogecoins. It wasn’t long before Moolah was shut down, and Green disappeared with the money, who was later found to be Ryan Kennedy, a serial scammer, and rapist.
And not just dogecoin, but even with other cryptocurrencies, several unregulated exchanges spring up one day and take off the next, leaving investors high and dry.
Pump and Dump
Cryptocurrencies aren’t really of any use except mindless trading. The volumes are meager and regulators are absent. This makes them a ripe target for pump and dumps by pumping rings which have existed since the very inception of cryptos.
When the Reddit user /r/wallstreetbets successfully managed to pump the Gamestop stock, the crypto pump rings saw this as the moment that they had been waiting for for years. They saw a gullible audience, that didn’t really know what it was doing, to follow them thinking that they would make a blow against the big guys and have fun doing so.
Needless to say, most stories ended on a bitter note, with several of these gullible traders buying at the peaks when the pump rings sold.
This is what took place on January 28, when a Reddit user decided Dogecoin be the next asset to pump. He was joined by Elon Musk, an obsessive Twitter user. The price of the Dogecoin rocketed up and crashed the next day.
Not just the Dogecoin, but several other cryptocurrencies, all are susceptible to such hostile market manipulation.
Too Volatile to be a global currency
All cryptocurrencies have seen massive volatility. In the image below, bitcoin and ETH are found to be more volatile than the S&P 500 itself. Even as the S&P volatility dies down, the crypto volatility keeps rising.
These are not the characteristics of a stable, fiat currency. What is expected of the currency is to hold its purchasing power stable even over long periods of time, not jump up or down 10% by the time one goes from home to the grocery store.
Poor Hedge Against Inflation
As 0% interest rates or even negative interest rates seem a possibility, bitcoin, among others, is touted as a hedge against inflation. Limited supply cryptos like Bitcoin are positioned as a hedge against this inflationary scenario. Why? Because of its 21 million limits, Bitcoin’s demand vs supply is expected to cause an increase in price as supply decreases.
Even the short history of Bitcoin is not enough to cement its position as a hedge against inflation. Gold on the other hand has had millennia of history of tracking inflation and yet it was susceptible to shocks, manias, and crashes over the shorter term. Bitcoin is no different.
Even in the recent weeks as concerns of inflation pushed the 10 year US treasury yield from 1.34% to 1.62%, bitcoin suffered its worst drop in months. Unlike other inflation hedges, cryptocurrencies’ value is based entirely on other people’s willingness to hold on to it, not on some underlying asset like oil or real estate.
It is fully possible that increasing inflation may lead to an overall recession. The real test of cryptocurrencies will be when investors pull their money from riskier assets like bitcoin or pour more into it.
The infinite supply of Dogecoins
While a few cryptocurrencies do have at least the “limited number” argument in their favor, Dogecoin does not even have that. 10,000 dogecoins can be printed every minute. This rather infinite supply of the dogecoin makes it very hard for it to gain in value.
However, in spite of this structural anomaly in Dogecoin, the prices have soared considerably over the past months.
So much for being Decentralised
According to a Wall Street Journal report, the largest holder of Dogecoin owns 28% of the currency! The position is worth at least $2.5 Bn today! The top 10 largest addresses combined hold 43% of the total Dogecoin supply. The idea behind Dogecoin being decentralized simply bites the dust when just 10 wallet holders own 43% of the currency. One major sell-off and the prices crash.
Will the party continue for Dogecoin?
Bears believe that the bubble could burst anytime soon. A game that has a definitive end in the near future. On the other hand, some enthusiasts feel the recent crash is just a minor setback. They still think that it has the potential to grow further in the future.
Can Dogecoin place itself as a reliable money system not limited to any particular state and government? Or will the influencers of crypto just have fun with it for a while and then forget about it for another eternity? Or will Dogecoin ever reach the $1 mark? Probably, Probably Not!
So the final question — whether to invest in this joke or not? Well, be clear about your investment goals first. It’s always a good idea to have a diverse set of investments for your portfolio which are harmless to your risk appetite. So ask yourself this — why do you want to invest in Dogecoin? To make instant money or a fortune that you see forthcoming?
Or maybe launch a crypto coin of your own. That is the sure-shot way to make some quick bucks.
This article has been co-authored by Khubaib Abdullah and Yogesh Lakhotia, who are in the Research and Insights team of Torre Capital.
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