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?
— DogeCoinResearch (@dogeresearch) April 19, 2021
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.”