This column was first published in SvD Näringsliv, in Swedish, on April 26th, 2021.
It started as a parody of cryptocurrencies – and recently became as valuable as Spotify. The cryptocurrency Dogecoin captures the present in a very clear way. Now the success risks undermining confidence in the entire market.
Not many people thought that the cryptocurrency Dogecoin would be anything other than what it was intended to be – a joke. The new financial world wanted something else.
The creation that the American engineer Billy Markus and his friend launched in December 2013 was based on a meme about the dog breed Shiba Inu. The joke is that the dog, who looks a bit lost, can hardly spell anything – not even his own name. Doge therefore becomes a misspelling of the English word “dog”.
Under normal circumstances, this meme had quickly been transferred to Internet history. But what happened is anything but normal. This week, the value of all Dogecoins temporarily exceeded $50 billion – surpassing the value of companies such as Ford, Twitter and Spotify.
How could this happen? To understand the underlying mechanisms, we do not have to go very far back in time. It is enough to take a closer look at the Gamestop hysteria at the beginning of the year.
Then, just like now, the rise has been driven by feverish activity on internet forums such as Reddit and Discord. The success there, as well as the fact that Bitcoin has skyrocketed in value, seems to have given many confidence that they’ve found the next shortcut to fast money. Because even if Gamestop fell after the worst hype, the share is still up over 800 percent since January 2021.
The method of talking up assets on forums works. The problem arises when the same people want to realize their profits and sell their assets. It requires an influx of new buyers that you can sell to. This is called “the greater fool theory” and is the investment world’s equivalent of the Swedish card game Svarte Petter – you do not want to be “the greater fool” when the game is over.
And it’s just like a game you should see the rise of Dogecoin. This is not about an analysis of economic fundamentals or an insight that the rest of the market lacks. Instead, it is more like a casino where you think you have found a trick to win more often. The fact that it is a cryptocurrency also makes it easier to justify extreme volatility. The much more established Bitcoin, for example, has increased over 80 percent during the year, from an already high historical level.
The rise in Dogecoin, which has accelerated around 18,000 percent in one year, is now creating problems for the entire crypto world. Companies like Tesla, WeWork and Time Magazine accept Bitcoin as a currency when you shop with them. Mastercard will also start accepting bitcoin in their network. The professionalization and acceptance of cryptocurrencies as legitimate means of payment that has taken place over the past year gets damaged by the association with Dogecoin.
The image that the crypto market is a financial playground for speculation is exactly the one that Bitcoin enthusiasts are trying to distance themselves from. In that context, a market value of $50 billion for Dogecoin, which later quickly fell to $35 billion, will not be an asset for the cryptocurrency world – but rather a burden.
The difference in maturity between cryptocurrencies makes it increasingly difficult to describe them all as a single market. Is it an emerging global currency? Is it a digital asset class? Is it the penny stocks of the digital age – a way to make quick money based on nothing?
The answer is yes to all of those questions.
It would therefore be wrong to let Dogecoin represent all of these strains. It is both a digital tulip field and an ongoing financial revolution.
This column was first published in SvD Näringsliv, in Swedish, on April 26th, 2021.