The idea that in some ways cryptocurrencies are fundamentally solid investments is a concept that I find difficult to grapple with. When it comes to Dogecoin (CCC:DOGE-USD) the argument becomes much more difficult for me to understand.
In fact, a cryptocurrency that was originally created as a hoax is now worth $ 6.7 billion. The digital token was developed by its founders to have no intrinsic value, other than to create an online community. The Shiba Inu symbol and related interest due to its meme status have generated numerous celebrity tweets and YOLO bets.
However, I am convinced that it is worthless.
So I think Dogecoin is perhaps the best example of the speculative bubble in cryptocurrencies right now.
Dogecoin: The Bigger Fool At Work Theory
The Greater Fool Theory is taught in business school classrooms and is shoved down the throat of most accredited investors. The idea of buying a security that knows it is overvalued or has questionable intrinsic value because others are buying it at a higher price is terrifying for most long-term investors.
One of the most important principles of fundamental investing is capital preservation. Investing in something that you do not fully understand or appreciate is not in line with these principles.
However, I would argue that the due diligence most investors do on cryptocurrencies today is roughly zero (or very close to zero). This is a purely speculative momentum bubble and no due diligence is required when a stock or digital token is “going to the moon”. However, I disagree.
I have tried in the past to subject cryptocurrencies to due diligence. I’ve found some models out there that have real intellectual capital behind them. What I found is a common theme among such models:
- The rising value of cryptocurrencies can be associated with an increase in the amount of money.
- Cryptocurrencies could have the potential to be the “new gold” or hedging instruments. These can be used to combat inflation and other factors that investors may want risk management tools for.
However, the assumptions made in most models require the firm belief that cryptocurrencies can become ubiquitous and therefore have the same properties as fiat money.
That’s where I start scratching my head.
Maybe, just maybe, I’m wrong
I was wrong. It happened a time or two in my life.
I am 100% ready to accept that in a few years we will all be paying more than just Teslas Bitcoin (CCC:BTC-USD). We will use bitcoin in the supermarket. We’re going to use it to get our hair cut. Maybe we use it to pay the craftsman (who often wants cash).
Governments will not step in and shut down cryptocurrencies. Indeed, from dark internet purchases of drugs, weapons, and fighters, cryptocurrencies will have moved to the mainstream.
I personally worked for a VC company with a specialist in crypto offerings. I asked him to explain how everything works.
Apparently he’s a lot smarter than me. After all, he made a ton of money investing in young startups, the crypto room, and other ways. Many of the pitches I’ve seen before remind me of Dogecoin in many ways. I didn’t understand the possession thesis then, and I’m not going to pretend I understand it now.
Any early-stage investment requires some sort of “leap in confidence”. Often you have to make unusual assumptions (whether with growth rate, churn, WACC, whatever). I agree to unusual reviews for startups. Most of these companies have nothing more to show for their work than a great team and a lot of “grit”.
However, this is vastly different from the assumptions I would have to make with a crypto option like Dogecoin. Simply put, these are not assumptions that I do not want to accept.
I think it’s important to reiterate Dogecoin founder Billy Markus’s comments:
“I’m no longer part of the Dogecoin project, which I left around 2015 when the community was turning a lot away from a community I was comfortable with,” he wrote. “I don’t currently own any Dogecoin, other than what I was recently told. I gave away and / or sold all of the crypto I had in 2015 after I was laid off and feared my then dwindling savings, roughly enough in total to buy a used Honda Civic. “
That sums up almost everything that investors need to know about Dogecoin.
At the time of this writing, Chris MacDonald held positions (either directly or indirectly) in any of the securities identified in this article.