It has often been hard to make sense of financial markets in 2021. First there was the 1,500 per cent rally in flailing video game retailer GameStop, then there was the $100m valuation of a New Jersey deli, and then there was a 15,000 per cent surge in dogecoin, a cryptocurrency designed as a joke.
"Do you want Tesla to accept Doge?" the electric car company's chief executive and self-styled "technoking" Elon Musk asked his Twitter followers on Tuesday. The tweet was just the latest of several Musk shout-outs to the digital coin, which is based on a meme showing the face of a Shiba Inu dog overlaid with an imaginary inner monologue: "Wow"; "so scare"; "keep ur hands away from me".
Dogecoin functions the same way as bitcoin — it's a digital token underpinned by a decentralised network of computers that process and keep track of transactions via a digital ledger called a blockchain. But unlike the original cryptocurrency, whose backers use highbrow arguments to justify and shore up its value, dogecoin has been a joke from the outset.
Yet while few people are claiming that dogecoin will "democratise finance", or become "the global reserve currency", or fundamentally change the world, since its creation in December 2013 it has hugely outperformed bitcoin. While the latter has climbed a remarkable 7,700 per cent during that period, dogecoin has rocketed by an almost unfathomable 200,000 per cent.
In other words, if you wanted to make some money on crypto over the past seven-and-a-half years and chose to buy bitcoin rather than dogecoin, the joke's sort of on you.
Dogecoin gives the lie to the idea that we should take bitcoin and other cryptocurrencies terribly seriously. While crypto evangelists might want everyone to buy into the notion that bitcoin is going to take over from the dollar one day, and that we all need to hold some of it in order to protect ourselves from the evil central bankers who want to inflate away the value of our money, the reality is that their arguments are largely just a self-interested attempt to boost the price of cryptocurrencies.
Much like a pyramid scheme, those who got in early on bitcoin have a huge financial incentive to draw in others by any means necessary. But while getting rich is clearly the main motivating factor — and some people have indeed managed to become incredibly rich from crypto — it is not the only one.
Buying into crypto should be considered akin to gambling and, like gambling, people get into it not just because they might make money, but also because it's entertaining. It's no coincidence that cryptocurrencies and "meme-stocks" have surged in a year in which much of the world has been locked up indoors. It is the result of what Bloomberg columnist Matt Levine has called the "boredom markets hypothesis".
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Crypto trading is often more accessible than gambling, particularly in places where betting is heavily regulated, such as in the US. It allows buyers to feel like they're in some kind of tribe. And while the "LOL" factor might not be considered a traditional metric for working out the value of an asset, that doesn't mean it shouldn't be: clearly, the extent to which it is fun to buy into something has an impact on how much it is bought, and nowhere can that be seen more clearly than in dogecoin.
The joke-coin makes a mockery of the idea that crypto investing should be considered a serious pursuit. Its very existence undermines the notion that bitcoin derives value from its scarcity. While bitcoin's total supply will eventually be capped at 21m, as written into its original source code, there is no limit to the number of copycat cryptocurrencies that compete with it — there are now almost 10,000, and dogecoin itself has no hard supply cap.
Dogecoin's success makes just as much sense as the rest of the crypto market — people buy into these coins because doing so is exciting, it gives them something to do and discuss with their friends, and of course because it can allow them to make a quick buck. But perhaps it can also allow us to stop taking the crypto project quite so seriously. While we're at it, we might do the same with the stock market.
- Financial Times