Is Dogecoin a Case of Asset Euphoria?

The cryptocurrency Bitcoin is experiencing another astonishing move in price. In the first few months of 2021, it climbed from $28,000 in January to around $48,000 in mid-February. Yet, Bitcoin isn’t the only cryptocurrency that is experiencing these gains.

Oddly enough, Dogecoin (pronounced dohj-coin) is currently on the rise. I bet you’re asking yourself the question, “why is this odd?” Dogecoin was originally created as a joke cryptocurrency. It is based on an old meme from the internet that features a doge (slang for dog), usually a Shiba Inu, and a caption of its internal monologue in the font Comic Sans.

We saw the effects of “meme stocks” earlier this year with Gamestop, Nokia, and AMC. If you’re unaware, a meme stock is a stock that experiences an increase in volume due to hype surrounding it on social media and not the company’s actual performance. While Dogecoin isn’t a stock, it is still benefitting from this phenomenon.

The Origins of Dogecoin

Dogecoin was created in about 3 hours in 2013 by a pair of software engineers as a joke. The idea was to make a cryptocurrency cheap enough so that people could tip each other for funny comments on online forums like Reddit. The creators purchased the domain, featured the Shiba Inu as the mascot, and captioned “Dogecoin is an open source peer-to-peer digital currency, favored by Shiba Inus worldwide.”

Valued at 1/5 of a penny for most of its life, you would think Dogecoin would live on in internet obscurity forever. As the past year has taught us, we should expect the unexpected. On January 28, 2021, a Twitter user by the name WSBChairman tweeted that Dogecoin was an asset to potentially get behind. The very next day, the price soared and was trading at 7 cents a coin. At this point, people started taking notice and began getting involved. Then Elon Musk tweeted about it, and Doge hit 8 cents.

The saying in the Dogecoin community is that they are going to take it “to the moon,” and the general consensus has been that the goal is to get the coin to $1.00. As of the week of April 19, 2021, the value is sitting around 30 cents.

Asset Euphoria

We can read all about the market dramatically rising and falling in our history books. Markets can rise because of strong economies, and these are what we refer to as good market booms. Yet, sometimes there are unreasonable market booms called market bubbles. They occur when investors pump money into an individual stock or market segment that’s far past its actual value.

“Asset euphoria” is how we describe investor interest in a bubble stock or sector. Just like blowing a bubble with gum, it’ll keep growing until there is nothing holding it up and it pops.

There are a few historical examples that fit the definition of asset euphoria that might sound like Dogecoin. The first being the Tulip Bulb Mania that took place in Holland in the 1630s. The upper class fought for the rarest flower bulbs when tulips became a symbol of status. Tulip bulbs were traded on the Dutch stock exchange and speculation was encouraged. At the height of the market, the bulbs were trading for several times the average of the Dutch annual salary. When the prices eventually dropped, panic selling began and many investors were left in ruin.

A more recent example is the dot-com bubble in the early 2000s. The Internet brought excitement and the promise of an international market and new ways of communication, overwhelming many investors. Investors blindly purchased stocks that were newly issued from the IPOs of internet companies whose stock prices quickly rose. Unfortunately for the investors, they never actually looked over the companies’ business plans. Since these companies weren’t able to make money, most of them reported massive losses and folded.

But how could these investors not see that this was going to happen? It’s obvious to us now why busts happen and how we can avoid them. However, even the sagest investors found it hard to imagine the huge issues that would develop. We can quantify, analyze, and watch market trends, but no matter what we do we can’t tell the future. All investors can do is be ready for market changes big and small.

Preparing for the Booms and Busts

How does an investor prepare to enjoy booms and avoid busts? One thing that can be done is to not give in to the lure of asset euphoria. Always remember that if it sounds too good to be true then it probably is. To ensure you do not lose large sums of money because of market changes, the best thing you can do is diversify your portfolio. If you have a diverse portfolio and don’t have all your eggs in one basket, then your risk is spread out.

One of the creators of Dogecoin, Billy Markus, posted an open letter on Reddit in early February that urged the community to get back to the fun Doge was originally intended for. Though, the closing remarks of the letter are ones that all investors should heed. He said to “keep educating yourself as much as you can on how cryptocurrency works, how these markets work, never risk more than you can safely lose, be vigilant and aware.”

To discuss your portfolio, talk to the financial professionals here at NEST Financial. Email to set up an introductory call. We’re here to help make sure you’re prepared for what the market throws at you.

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