By Peter St. Onge *
Elon Musk’s Dogecoin tweets have given the coin a good run, sending its price from fractions of a penny – where it traded for about 8 years – to 40 cents on April 20 before falling behind. It was enough to stop Bitcoin skeptic Peter Schiff from watching his gold portfolio – even for about 8 years – do nothing to crow that “Dogecoin is eating Bitcoin” and ask Dogecoiner to put laser beams on their noses .
What’s the story: will Dogecoin overtake Bitcoin and then USD to become the world’s reserve currency?
Very wow, but no. The short answer is that Dogecoin and Bitcoin basically serve different purposes: At best, Dogecoin is one of many MOE (Medium of Exchange) coins, while Bitcoin stands as a stable and secure store of value (SOV) in which people can store their savings park. In other words, Dogecoin does not compete any more with Bitcoin than your plate with your fridge, pantry or freezer.
First, let’s get out of the way that Dogecoin started as a joke. Critics use this to criticize Dogecoin itself differently or to criticize Bitcoin as a joke through contagion. Unfortunately, the universe doesn’t care why you invented something. Gunpowder was invented for fireworks, not war, and Coca Cola was invented to get high, not for kids who want to enjoy it with a happy meal. Twitter was invented as a podcasting platform, Facebook as hot or not, and Wikipedia as the most authoritative source of human knowledge. The universe doesn’t care why you invented something, users decide.
What is Dogecoin? Like Bitcoin, it is a proof of work (POW) coin, with transaction processors voting on the rules of the game, including how new coins are made. There are 129 billion Dogecoins with 5 billion new coins being issued each year, representing an annual supply inflation of 3.9%. The 5 billion is constant, which means that Dogecoin inflation will keep dropping as new coins add to a larger base – in 4 years it will drop to 3.3%.
By comparison, there are 18.6 million bitcoins growing at 330,000 per year, with annual supply inflation at 1.7% per year. Bitcoin’s supply inflation is also decreasing, halving every four years, so supply inflation will fall below 1% per year in 2024 when it is lower than gold supply inflation of around 1.5% per year.
Next up, speed and fees. While Bitcoin creates a new block of transaction records every 10 minutes, dogecoin creates one every 1 minute. However, given dogecoin’s smaller ecosystem (market cap, miners), you’ll want to wait for multiple block confirmations to be sure. For example, the Kraken crypto exchange takes 40 Dogecoin blocks – 40 minutes – before a valid deposit is considered, just as it is needed for Bitcoin. So it’s a functional link to speed.
Next, fees. Dogecoin was very cheap until recently; A year ago, sending a transaction cost a fifth of a cent. It has a little more capacity than Bitcoin, but the main reason was almost no one was using Dogecoin, so it was like buying space on an empty cargo ship. Unfortunately, now that Elon’s tweets got Dogecoin out of the mud, those fees rise to $ 1.09. More on that later, as it’s about the long-term prospects of dogecoin as a MOE.
So far, a Peter Schiff could say: “Sure, everything sounds like a Bitcoin clone.” And that brings us to the important question: how do people use it. We can read this directly from the evaluation as a usage relationship. This basically tells us whether people are using Dogecoin to store savings like they do with Bitcoin, or whether they are simply using Dogecoin for transactions.
In that regard, Dogecoin goes for 35 cents today, which makes those 129 billion coins worth $ 45 billion. While Bitcoin’s 18.6 million coins are currently worth $ 1 trillion. According to CoinMarketCap, 66 billion Dogecoins worth around 23 billion US dollars and 1 million Bitcoins worth around 55 billion US dollars are currently traded daily. Divide the two and you will get a market value of Bitcoin at 20x daily volume, but only 2x for Dogecoin. This tells us loud and clear that Dogecoin is not a store of value. It may not even be a very good medium of exchange as pure MOE coins like Monero or Dash trade around 4 times daily volume.
Why does the market think Dogecoin is a crappy place to park your savings? We can speculate that given that it has been essentially abandoned for 8 years and populated by charming but under-engaged users, it is not with the social class of Bitcoin, network effects, brand trust and loyalty, engagement and stability of the owners and can even compete with Bitcoin in terms of energy consumption, which increases security by increasing the cost of an attack. This last point is important when you consider that the sovereign attack was the last battle that killed all previous private money in history.
If Dogecoin isn’t considered an SOV for solid reasons, it means it doesn’t even compete with Bitcoin. No more than your plates compete with your refrigerator. While both are inputs to the food, they involve different stages with negligible overlap. For example, buying a nicer set of plates is not emptying the refrigerator, and buying a larger refrigerator or moving it to a place where it is easier to get to, you don’t need to buy smaller plates. And, what matters to market cap, the vast majority of the food you own is in your fridge or even freezer (“cold store”) and is never on a plate. Just as the vast majority of people’s savings are in a bank, house, or stocks, and out of pocket to be flogged on July 11th.
It has to be a separate article, but the broader lesson here – aside from Peter Schiff’s dreams of a Dogecoin standard – is that Bitcoin skeptics are far from complaining about Bitcoin fees or 10-minute blocks. Bitcoin doesn’t pretend to be a medium of exchange, and it hasn’t been for years. Users consider it a store of value, and it turns out to be darn good. Nothing else comes close, and certainly not Dogecoin.
So if Dogecoin isn’t competing with Bitcoin, who is it competing with? Easy: MOE coins and exchange. Given that these solutions work in seconds and the fees are even lower than the days before dogecoin’s Elon, it’s not clear why one would bother. In this case, Dogecoin would not even be an MOE, but this streetwalker among the cryptocurrencies: a speculative coin. One whose purpose in life in practice is to speculate on Elon Musk joke tweets and then sleep like a cicada for 8 years.
Can Dogecoin still go up? Sure, speculative assets are rule 34 of the financial world – they can do anything. But the basics are not there to maintain the permanent demand for Dogecoin, least of all as a store of value and, I believe, not even as a medium of exchange.
* About the author: Peter St. Onge is an Associate Researcher at the Mises Institute and a Fellow at the Montreal Economic Institute. For more content from Dr. St. Onge subscribe to its business and cryptocurrency newsletters.
Source: This article was published on the MISES Institute and originally published on CryptoEconomy