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Down 80% From Its 2021 High, Is Dogecoin a Buy?

Motley Fool - Fri Jan 14, 8:10AM CST

The overall cryptocurrency market lost roughly 10% of its value in the six-day span from Jan. 5 to Jan. 11. Because of digital currencies' volatile and unproven nature, investors are most likely parting ways with them due to the elevated uncertainty facing the economy today. Topics like inflation, the Fed's actions, and the ongoing pandemic are spurring a rush to safer assets.

Dogecoin(CRYPTO: DOGE), the once-surging meme coin that sparked interest on social media from the likes of Tesla CEO Elon Musk, is probably the most speculative cryptocurrency out there. And for whatever reason, its price has come crashing down over the past several months, enticing daring investors to possibly add it to their portfolios, hoping for a quick profit.

Is Dogecoin a buy now that it's massively off its 2021 high?

A Shiba Inu dog on the beach.

Image source: Getty Images.

An overview of Dogecoin

Dogecoin was created as a joke in 2013 by two software engineers, Billy Markus and Jackson Palmer, who met online. Based on the popular meme at the time of a Shiba Inu dog, the cryptocurrency was meant to be a fun competitor to Bitcoin(CRYPTO: BTC). It carries the same consensus mechanism, called proof of work, as the world's most valuable cryptocurrency, and it's also a payments network. This requires miners to use huge amounts of computing power in order to solve complex math problems to earn the right to validate a transaction on the blockchain.

Surprisingly, Dogecoin quickly gained a following since its founding a little over eight years ago. It has skyrocketed more than 37,000% in value during this time primarily as a result of hype built on social media. When the meme-stock craze, characterized by the soaring prices of AMC Entertainment Holdings and GameStop, took hold of the market a year ago, Dogecoin rode this trend to new heights.

But compared to cryptocurrencies likeBitcoin, which is slowly becoming a legitimate digital store of value, and Ethereum, the most-popular programmable blockchain that encourages development of decentralized applications and non-fungible tokens, Dogecoin has no use in our daily lives. It is accepted as a method of payment by 1,900 merchants worldwide, a ridiculously tiny number.

And the basic economic principles of Dogecoin make it extremely difficult for the token to rise in value. There are currently 130 billion coins circulating, with an additional 10,000 created every minute. That's why the price of DOGE, Dogecoin's native token, is so small at just over $0.15. Demand would need to outpace a rapidly increasing supply to support price appreciation.

Should you buy Dogecoin?

Based entirely on the fact that Dogecoin has no real-world utility, I don't recommend investors buy it. With the price significantly down from its recent high, scooping up this meme coin might seem like a low-risk move with big upside. But your buying would be based purely on speculation, hoping that the coin becomes popular again and the price pops. No one can predict with even the slightest accuracy if this will happen or where the price of Dogecoin is going next. Therefore, this is not a solid investment strategy.

If you're interested in putting some money to work in the crypto space, there are much better options than Dogecoin.

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Neil Patel owns Bitcoin and Ethereum. The Motley Fool owns and recommends Bitcoin, Ethereum, and Tesla. The Motley Fool has a disclosure policy.