When Dogecoin Is (Almost) Bigger Than Twitter…

When Dogecoin Is (Almost) Bigger Than Twitter…

I told myself I wasn’t going to dedicate any additional space to the Dogecoin phenomenon, but ultimately, I felt compelled to weigh in on what may very well be remembered as one of the silliest endeavors in recent financial history.

By “endeavor,” I don’t mean Dogecoin itself. It’s silly, yes. But it’s a joke. Intentionally and literally. There’s nothing wrong with jokes, and I suppose if you like giggling away your loose change on silly things, a digital token inspired by an eight-year-old meme about a circumspect Shiba Inu is no worse than wasting pennies on perks tied to some addictive app on your smartphone.

The problem with the Dogecoin joke is that although everyone claims to be in on it, they keep chasing it ~400% higher. That’s quite a bit like claiming you understand you’re going to lose your winnings in Vegas if you don’t cash out, and staying at the table anyway. On some level, you do understand what’s goin on. But on another level, it’s never a pleasant experience when money you could have had in your pocket ends up lost because you didn’t walk away.

This is a different sort of dynamic than spending money on in-app purchases for some game you like. You might be addicted to the iPhone game, but the rush you get from playing it isn’t as powerful as that experienced when gambling. And at the end of the day, markets are just casinos. And Dogecoin is just a penny stock.

I’ve argued that the psychology is even more vexing with Dogecoin thanks to the participation of folks like Elon Musk. I explained this back in February, when Musk was busy amusing himself with the situation on social media. Recall the following excerpts from “Elon, Dogecoin And Markets Gone Mad“:

If something trades for one penny (or a fraction of a penny), almost everyone can afford to speculate in it, by definition. Because there’s usually no way to “value” a stock that trades below 50 cents (let alone one that trades below 10 cents), it’s virtually impossible to know when to take profits.

In cases like these, people generally know that what they own has no real value. But until a given unit of something costs more than, say, a dollar, it’s very easy to make the case (to yourself) that there are still innumerable “greater fools” out there. As the price rises, the odds of those “fools” piling into the trade increase. To a point.

For most people, “Why not?” (as a rationale for speculation) is almost equally applicable at 5 cents, and 10 cents, and 20 cents, and even 50 cents, as it is at 2 cents. People who bought at 2 cents know that, so it’s very difficult to decide when to book gains. And because the initial investment was essentially costless (on a per-unit basis, anyway), it’s easy to characterize prospective losses as trivial.

Ultimately, it becomes impossible to know when to get out. The initial bet makes sense, as much as something like this can. You buy Dogecoin for a penny and hope that a catalyst — a Musk tweet, for example — comes along and pumps it to a nickel. You can then cash out with a huge gain.

But it’s rarely that simple.

Because once Musk gets bored in the middle of the night and your bet pays off, who’s to say he doesn’t tweet something else three hours later? And who’s to say 5 cents (your initial “target”) doesn’t woefully underestimate the extent to which the dynamics just described could push it to 50 cents? Even if it only goes to a dime, you’ve missed a huge gain (in percentage terms anyway) if you sell at a nickel.

Nearly three months on, and that could scarcely seem more prescient.

As you’re probably aware, Dogecoin traded all the way up to around 44 cents recently, crashing Robinhood in the process. The company, already the subject of intense scrutiny and controversy, explained itself. “Interest in Dogecoin has exploded over the past two days. Its price has skyrocketed nearly 7-fold and Dogecoin remains a top trending topic on Twitter,” a Friday post read, adding that,

As one of the few platforms where customers can purchase Dogecoin, our platform is right at the center of this surge. For context, Robinhood rose to the #1 downloaded free app on the Apple app store.

On Thursday evening, interest in Dogecoin surged as it rose past 25 cents, putting extreme pressure on crypto trading systems. As we processed orders, one of our systems failed, which brought down our crypto order system. The system was recovered in about an hour, meaning customers could trade with some intermittent issues. We were back to normal within two hours.

In my judgement, this is reckless. Robinhood’s “gamification” of stock trading has already blurred the line between Candy Crush and investing. Now, the company is fusing Vegas with Candy Crush and penny stock dynamics, all in the name of a fake asset.

On Tuesday, a new social media campaign attempted to tie the token to tokin’ (if you will). It was 4/20, and what better way to celebrate a weed holiday than to smoke a blunt of Lemon Cherry Gelato and buy some Dogecoin?

As Bloomberg helpfully explained, “fans [were] rallying behind the #DogeDay hashtag to celebrate April 20, known in cannabis culture as a day for smoking marijuana.”

Ultimately, Dogecoin was briefly worth more than Ford and, ironically, nearly as much as Twitter (figure below).

What’s especially vexing about this is that even discussing it to deride it risks accidentally legitimizing it, something which seems to be lost on big-name crypto adherents.

Take Mike Novogratz, for example. “[Dogecoin] doesn’t really have a purpose,” he told Bloomberg Television, calling it “reminiscent of GameStop” and noting that he’d “be very, very worried if one of my friends was investing in Dogecoin at these prices.”

That’s not a great answer. For one thing, you can’t “invest” in Dogecoin. There’s nothing to “invest” in. Even using that word in the same sentence as Dogecoin sends the wrong message.

But more importantly, someone like Novogratz might consider whether to take the opportunity to say something meaningful — even profound — about the state of the crypto universe.

It would be nice, for instance, if Novogratz were to say: “You know, I’ve obviously gone all-in on crypto and while I steadfastly believe it’s the future, events like this do give me pause. Because, frankly, if a purposeless token created as a joke can attain a valuation in excess of Ford’s market cap, then it’s unclear to me what, if any, boundaries there are on this industry that I’ve become the face of.”

9 thoughts on “When Dogecoin Is (Almost) Bigger Than Twitter…

  1. Doge is a much better value than BitCoin…….in my opinion, both will trade close to Zero.

    Hard to believe the investment community is so gullible.

  2. Is Dogecoin dumb? Yes. A bubble? Yes. But what if someone decides to buy a bunch of Dogecoin, take-over the chain and use it as a community token? It already has a vast network of adoption, one could transfer that into a valuable community ecosystem run on Dogecoin.

    It’s easy to pass judgement and sneer at something stupid. And Doge likely is just that. But considering how wrong so many investors have been on this space for so long, I try and refrain from passing judgement.

    Also while we’re on the topic of ‘crazy bubbles’: Gamestop was first and foremost a phenomenal risk/reward deep value, fundamental trade. That’s why Burry, Ryan Cohen and Roaring Kitty all held last summer. Shorts massively overestimated the likelihood of bankruptcy and long-term secular risk, whilst underpricing future upside of an Omnichannel gaming experience business with an existing strong network, combined with Ryan Cohen (Chewy fame) getting more involved.

    As Roaring Kitty said last summer in one of his livestreams, he was more confident not being short than being long, but the risk/reward fundamentally was great, and the ‘short squeeze’ idea was just a secondary, low conviction possibility.

    1. An interesting perspective there, Peter,

      But when our small but high-end firm started getting questions about Gamestop they were passed over to me. As the resident shellback I asked the youngsters in our firm and families who were into gaming when the last time they had set foot in a Gamestop store out at the mall. “Back when I was in high school.” More damning was the comment that “the platforms are where we get our games. The new players don’t even have dvd drives.” So, Gamestop is going to muscle into the closed platforms? Seriously?

      My “analysis” was that it was Blockbuster redux.

      But when speaking to a client who had started daytrading in another account I heard that magical and maniacal excitement I recalled from my old days in the prop desk/hedge fund world.

      Sorry, but there was ZERO in-depth thought given to the pivot to a latecomer online model was only mentioned in passing. Those guys NAILED it finding a stock where the short interest was larger than the total float. Nicely done, but end of story,

      BTW – I was delighted to see those shorts get what they got.

      1. I also disregarded Gamestop because I had anecdotal evidence of people not shopping for physical disks anymore. But the statistics are that a surprising number of people still use physical (+ new PS5 has disk drive). I agree there are still a lot of long term secular risks, but where Gamestop was trading in the $4 range last summer was crazy. If you have the time and interest, I would highly recommend watching a few minutes of Roaring Kitty’s livestreams on YouTube from last Fall. I really didn’t understand why anyone would want to buy GME until I heard his perspective and it partially changed mine.

        1. That’s all fine and good, but I don’t want to tie up my capital in a business that sells physical video games out of physical locations. If Jeff Bezos decided, tomorrow, that he wanted to dominate the market for video game distribution, he could just hop on the phone to every major game studio and to Microsoft and Sony and say “Hey, we want to dominate this market and I’ll pay whatever it takes to do it. Let’s get started.”, GameStop would be out of business in a year. I mean, why would anyone want to tie up their money in something like GameStop? Sure, it may be worth more than $4, but so is a lot of stuff trading at $4. If you’ve got enough spare capital and the risk tolerance to put (I don’t know), $100,000 behind it on the firm conviction you can turn that into $400,000, then that’s wonderful. But who on Earth cares, in the grand scheme of things, if somebody turns $15,000 into $45,000? So what? That ain’t no money. That’s not even the median household income in the US. And the risk you took on to make it is absurd compared to the reward. If all you could afford to bet was $15,000, then you shouldn’t be taking those kinds of risks. You’d be (far) better off putting that $15,000 into an S&P 500 index fund for your kid. I mean, yeah, “Roaring Kitty” made millions, but by his own admission, a lot of that was thanks to a short squeeze the scope of which he couldn’t possibly have predicted a year ago.

          (Obviously, when I say “you,” I mean the editorial “you,” not “you,” Peter the commenter. I’m just making a general statement about the situation. It reminds me of these people who brag about turning $10,000 to $50,000 in Bitcoin. Someone who’s wealthy makes or loses more than that every minute the market is open on blue chips. Their quarterly dividends dwarf those gains. I mean, people should try to build wealth first, and then take these kinds of risks second. Once you’re wealthy, then you can say “Ok, I’ve got $25 million, I like GameStop at $4, I’m going to put $250,000 behind it and make $750,000. Then you’re cookin’ with grease. But you gotta get there first, and the way to do it, safely and rationally, is to make intelligent investment decisions for a couple of decades before you go slingin’ your guns around on a defunct video game retailer.)

  3. I don’t understand why dogecoin will not become worthless in the end. For Bitcoin their is a limit on the number of coins that can be mined but i don’t think Dogecoin has such a limit, so won’t people just mine them forever?

  4. Cryptocurrencies; a mashup between investing and online video gaming. Is it just minecraft with money as something to seek. And, if cryptos can pop up on a tweet, who’s to say catecoin and rattycoin are not far behind.

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