1 Major risk of investing in Dogecoin
Dogecoin (CRYPTO: DOGE) has made headlines in recent months for its staggering returns. Since the start of the year, the price of Dogecoin has climbed almost 7,000% as of this writing. Over the past 12 months, it has increased by over 15,500%.
In comparison, two of the biggest names in crypto, Bitcoin (CRYPTO: BTC) and Ethereum (CRYPTO: ETH), have seen their prices increase by approximately 300% and 1000%, respectively, over the past year. While many cryptocurrencies have seen record returns, Dogecoin is in a league of its own.
It’s hard to ignore numbers like these. However, just because an investment generates sky-high returns doesn’t necessarily mean it’s a good idea to buy. Dogecoin may be too good to be true, and there is a huge risk to consider before investing.
A low price is not always a good thing
Cryptocurrencies like Bitcoin and Ethereum may be the biggest players in the crypto space, but they’re also expensive. In mid-April, when Bitcoin hit its peak, it was costing around $ 65,000 per token. Ethereum cost just over $ 4,000 per token at its peak in mid-May.
Dogecoin’s record, however, was only $ 0.68. With such a low price, it is one of the more affordable investments. And if you’re about to invest, it can be tempting to buy Dogecoin just because it’s cheap.
This can be an incredibly risky decision, however, as affordable investments aren’t always good investments. If you buy Dogecoin just because it’s cheaper than its competition, you could still lose money.
While all cryptocurrencies are risky, Dogecoin is one of the most dangerous investments. Before you even consider buying, it’s important to think about how that investment might unfold over time.
Will Dogecoin survive in the long term?
With any investment, the most important factor to consider is whether or not it is likely to experience long-term growth. Long-term investments are more likely to bounce back from downturns and maintain a competitive edge in their industry.
Cryptocurrencies, in general, are still very speculative. In other words, no one knows for sure whether they will still be around in a few years or decades. Dogecoin, however, is particularly risky as it does not have as much utility as its competitors.
In order for a cryptocurrency to become mainstream, it needs to have some type of real-world use. Bitcoin is the most popular type of cryptocurrency, and it is the type that traders are most willing to accept. This gives it a significant advantage as widespread adoption will be the key to the success of any cryptocurrency.
Ethereum also has real-world utility through its blockchain technology. The Ethereum blockchain not only hosts its native token, Ether, but it is also the network used by non-fungible tokens (NFTs), decentralized finance, and thousands of other applications. Ethereum technology has the potential to revolutionize various industries, and if it is successful, its cryptocurrency, Ether, has a good chance of thriving as well.
Dogecoin, on the other hand, is of very little use at the moment. The few traders who accept crypto are more likely to accept Bitcoin than Dogecoin, and Dogecoin doesn’t have any major advantages over its competition.
Will Dogecoin price continue to rise?
Of course, despite very little real-world utility, Dogecoin’s returns have always outperformed its competition. However, these gains are largely artificial and likely won’t last forever.
Part of the reason the price of Dogecoin has skyrocketed is because it has been heavily promoted online. Famous billionaires like Elon Musk and Mark Cuban have been promoting Dogecoin on social media, and retail investors have invested en masse.
The more people who invest in an asset, the more its price increases. Dogecoin’s run is similar to the GameStop saga earlier this year, when investors raised the stock price only to empty it soon after in an attempt to make a quick buck.
With any investment, if the stock price doesn’t match the underlying fundamentals, that’s a red flag. Dogecoin has little use and no competitive advantage in the industry, but its price has skyrocketed. This is a sign that this growth will not continue in the long term.
The price of Dogecoin has already worsened over the past two weeks. And unless he develops a way to stay competitive, there’s a good chance he won’t survive over time. So no matter how cheap it is, it’s still a dangerous investment.
Where to invest instead?
Whether you choose to invest in cryptocurrencies or stocks, it’s always a good idea to research the underlying fundamentals of an investment. Look beyond the price and try to determine if the investment has real utility and significant competitive advantage.
The best investments are those that are most likely to experience long-term growth. Dogecoin might not be the best investment right now, but there are plenty of safer options that still have the potential to generate higher income.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Questioning an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.