For more than 100 years, the stock exchange has been the preferred wealth creator. It has historically achieved an average annual return of around 7%, which is higher than any other asset class.
But in the past decade, cryptocurrencies have turned in the broader market. Although Bitcoin (CRYPTO: BTC) tends to generate the most press in the crypto space, Dogecoin (CRYPTO: DOGE), the so-called “people’s currency”, has delivered some of the highest returns. In just six months between early November and early May, Dogecoin achieved a return of 27,000%, which is more than the benchmark S&P 500 has repaid over the past 56 years including dividends!
Unfortunately, the Dogecoin dream seems to be coming to an end. Since peaking at nearly $ 0.74 on May 8 – the same day Tesla CEO and Dogecoin fan Elon Musk performed on Saturday Night Live – Dogecoin has lost three quarters of its value. On June 21, Dogecoin was trading for less than $ 0.17 per token.
Some people may call this a healthy retreat or an incredible buying opportunity. As for me, I find this implosion completely predictable. Here are 10 tell-tale reasons why Dogecoin’s hype-powered pump was destined to end up in an inglorious garbage dump.
1. Only a very small part of the companies accept Dogecoin
To start with the obvious, Dogecoin has extremely limited usage in the real world. It could be tradable on Coin base Now, however, only around 1,400 mostly obscure companies worldwide accept Dogecoin as a means of payment, according to the online business directory Cryptwerk. For those who still think they’ll get in before widespread adoption emerges, it took Dogecoin eight years to reach only about 1,400 companies. As for context, there are an estimated 582 million entrepreneurs worldwide.
2. The average daily blockchain transactions are declining
If you need even more evidence that Dogecoin’s popularity has been grossly overrated, just take a closer look at the daily transaction count on its blockchain. After an average of 35,000 to 55,000 daily transactions between July 2020 and May 2021, only 20,000 to 35,000 transactions were carried out daily on its blockchain last month. Remember that Visa capable of processing roughly 24,000 transactions per second, Dogecoin has been ridiculous to use lately.
3. The transaction fees are much higher than other popular cryptos
One of the main tenets of the Dogecoin hype was that transaction fees were significantly lower than those of the Big Two, Bitcoin and ether. While this is true, Dogecoin’s transaction fees are also significantly higher than a number of other competing (and popular) tokens. Stellar, Nano, JOTA, Litecoin, Cardano, Ripple, currency, Bitcoin SV, Bitcoin cash, Ethereum classic, DigiByte, Line, and a long, long list of other digital currencies all have lower transaction fees than Dogecoin. In many cases, these networks also check and settle transactions faster than Dogecoin.
4. There is no barrier to entry into the crypto space
To build on the previous point, there is a seemingly endless supply of new cryptocurrencies and blockchain projects that are being rolled out on a regular basis. With the barrier to entry into the digital currency area absent, Dogecoin makes the lack of competitive advantage a duck.
5.Musk’s tweets were missing teeth (and tangibility)
Elon Musk was a driving force for Dogecoin. But except for his announcement that he is working with the developers at Dogecoin to improve network efficiency, absolutely none of Musk’s other tweets and memes regarding the coin had any substance behind it. It’s also worth noting that the “Dogefather” has switched to Bitcoin before, so his conviction to wholeheartedly support Dogecoin should be taken with a grain of salt.
6. China has gained a foothold
Another reason the Dogecoin train derailed was the crackdown on Bitcoin mining in China. Even if Bitcoin is a completely different token than Dogecoin, the thesis here is clear: China does not want digital currencies that compete with its yuan, which is supported by the central bank. This suggests that some governments disagree with digital currencies infiltrating their economies. As the world’s second largest country by gross domestic product, China’s actions have caused ripples across the crypto space.
7. Mining inflation is constantly devaluing “Hodler”
Although it pales in comparison to Dogecoin’s lack of real utility, the ongoing token inflation caused by mining is causing another problem for this cryptocurrency. In a typical year, 5.2 billion Dogecoin will be generated through cryptocurrency mining (i.e. the validation of transactions on the Dogecoin blockchain). In 2021 this will result in circulating supply inflation of around 4%. That may not sound like much, but it has been well over a decade since the inflation rate in the US exceeded 4%. Suffice it to say, Dogecoin holders – or, as they call themselves, “hodlers” – see their positions constantly being eroded by watering down.
8. Dogecoin lacks decentralization
One of the core purposes of digital currencies is to ensure decentralization, meaning that large entities do not have significant control over a network. Unfortunately, Dogecoin fails because of these decentralization efforts. According to BitInfoCharts.com, only 95 addresses control 66.01% of all outstanding tokens, even though more than 3 million addresses have Dogecoin worth at least $ 1. If and when these Dogecoin whales sell, they can easily depress the price of the people’s currency.
9. Margin is a big problem
The increase in leverage on cryptocurrency exchanges is another reason Dogecoin was destined for disaster. Back on May 19, Bybt.com reported that a sudden drop in digital currency prices triggered margin calls from more than 887,000 crypto account holders and liquidated around $ 9.4 billion in crypto assets to cover those debts. While margin can increase investors’ profits, it can also increase their losses if their timing is wrong. With brokerage firms allowing significant margin utilization on these highly volatile assets, it was only a matter of time before margin calls would crush those playing on Dogecoin.
10. All bubbles burst at some point
After all, the story is crystal clear that all bubbles burst without exception. No matter how excited investors are about a next-big-thing technology, the introduction of this technology never lives up to high expectations. While blockchain could have a bright future, companies are hesitant to deviate from their proven payment infrastructure. With no apparent competitive advantage, Dogecoin was a pump-and-dump-based bubble just waiting to burst.
This article represents the opinion of the author who may disagree with the “official” referral position of a premium advisory service from the Motley Fool. We are colorful! Questioning an investment thesis – even one of our own – helps us all think critically about investing and make decisions that will help us get smarter, happier, and richer.