On May 4, 2021, Robinhood, one of the most popular trading platforms in the U.S., experienced a crash in cryptocurrency trading. The culprit behind this is Dogecoin, a cryptocurrency featuring the face of an internet meme known as the “Doge”. Since the beginning of 2021, the value of Dogecoin has risen by over 11,000\(\%\). Dogecoin even received endorsements from tycoons such as Elon Musk and Mark Cuban. How has a meme coin become one of the largest cryptocurrencies in the world?
What are Cryptocurrencies?
Cryptocurrencies are decentralized digital currencies protected by cryptography. Most cryptocurrencies are based on a structure called blockchains. Blockchains are a type of database and store information about online transactions. They are designed to be decentralized so that all users have access to transaction records. A centralized institution such as a bank is not needed. Transactions are verified through a process called mining. Mining is done by computers that solve complex cryptography problems that cannot be solved by hand. It rewards miners with new copies of cryptocurrencies.
The most common cryptocurrency is Bitcoin, the founding cryptocurrency. All other cryptocurrencies are categorized as “altcoins”. Each “coin” has a price associated with it in U.S. dollars. One Bitcoin is currently around \(\$\)55,000, while one Dogecoin is around \(\$\)0.50. Another metric of cryptocurrencies is market capitalization, the total value of a cryptocurrency in circulation. The current Bitcoin market capitalization is around \(\$\)1 trillion, while for Dogecoin it is around \(\$\)84 billion. These figures are rather volatile, so investment in cryptocurrencies is always risky.
Features of Dogecoin
Dogecoin is a fork of Lucky Coin and Litecoin, which means Dogecoin was created based on their technologies. Unlike Bitcoin mining which uses the costly SHA-256 hashing algorithm, Dogecoin uses the more efficient Scrypt algorithm. It only takes one minute to mine a block of Dogecoin! Therefore, it is much easier and costs less to mine Dogecoin than Bitcoin (Of course, 1 Bitcoin is worth much more than 1 Dogecoin).
Another important feature of Dogecoin is its inflationary nature, unlike Bitcoin. The number of Bitcoins that can ever exist is capped at 21 million. There is no such limit on Dogecoin. There is, however, a limit on the number of new Dogecoins per year: no more than 5 billion. Since the supply of Dogecoin is always growing, Dogecoin owners are encouraged to spend Dogecoins instead of hoarding them. This makes Dogecoin a more suitable real-world currency than Bitcoin.
History of Dogecoin
In 2013, a meme called the Doge became viral in online communities such as Reddit. It features a female Shiba Inu dog. A software engineer in Portland, Billy Markus, found the meme funny and wanted to create a cryptocurrency that resembles the Doge. He found a collaborator in Jackson Palmer. The duo officially launched Dogecoin on December 6, 2013.
In January 2014, a month after its launch, Dogecoin generated much interest in the cryptocurrency community. At that time, it became the most popular altcoin, even briefly surpassing Bitcoin in trading volume. During the cryptocurrency bubble in 2017 and 2018, Dogecoin reached a peak price of \(\$\)0.02 and a peak market capitalization of almost \(\$\)2 billion. Just like most cryptocurrencies however, Dogecoin crashed after the bubble burst. It remained quiet for a while until the coronavirus pandemic hit.
On July 1, 2020, TikTok user James Galante posted a video promoting Dogecoin. He said in the video, “Let’s all get rich. Dogecoin is practically worthless...Invest just 25 dollars. Once the stock hits \(\$\)1, you will have \(\$\)10,000. Tell everyone you know.” The video soon went viral and reached almost one million views. A week later, the price of Dogecoin spiked but crashed soon after. This was the first attempt by social media to pump the price of Dogecoin.
In January 2021, a group of Redditors in the subreddit r/SatoshiStreetBets tried to pump up the price of Dogecoin, inspired by the success of r/WallStreetBets who pumped up the price of GameStop. They received the backing of Elon Musk this time who tweeted in support of the currency. On January 29, Dogecoin soared 373\(\%\) to \(\$\)0.05. Another attempt was made in April in which the price of Dogecoin broke \(\$\)0.6.
Concerns over Dogecoin
The rapid rise of Dogecoin is not completely organic. There have been many concerns about Dogecoin as a “pump and dump scheme”. In a pump and dump scheme, the scammer spreads misleading information through social media platforms to boost the price of a stock, often claiming it is the “next big thing”. After the investors jump in, the scammer then sells all of their shares and causes the price of the stock to drop significantly and investors to lose most of their money.
Dogecoin checks a lot of boxes for a pump and dump scheme. It is almost certain that some groups of people are trying to drive up its price artificially. Most recently this was done by the Reddit community. Another red flag is that unlike communities of other cryptocurrencies like Bitcoin and Ethereum, the Dogecoin community is no longer focused on innovations; instead it is filled with people who want to earn quick money. Stocks and cryptocurrencies of this nature tend to be more volatile, so if you are investing in Dogecoin, be prepared to lose money.
Dogecoin went from an unknown currency in 2013 to the fourth biggest cryptocurrency in 2021, an incredible journey. Although Dogecoin has a decent architecture and design, its most appealing attribute is its status as a meme coin. Since 2020, there have been repeated attempts to manipulate its price through TikTok, Twitter, and Reddit. Many experts have labelled it as a pump-and-dump scheme. Thus, if you want to invest in Dogecoin, remember: never invest more than you’re willing to lose.
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