As they say, what goes up must come down. And cryptocurrency is no exception — with its total market cap cratering roughly 56% to $980 billion year to date. That said, not all coins are the same. Dogecoin (DOGE 0.13%) faces specific challenges that could make it a particularly bad way for investors to bet on a potential rebound in the industry. Let’s dig deeper.
The hype is dead
Originally founded to satirize the wild speculation in the crypto industry, Dogecoin is the original “meme coin” — a type of cryptocurrency that relies on hype to attract investors instead of technical advantages. The asset benefited tremendously from the efforts of Tesla‘s CEO, Elon Musk, who frequently tweets in its support. However, the enthusiasm has proven to be unsustainable without fundamentals to back it up. And macro-level challenges could make the situation even worse.
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Within the crypto ecosystem, over $1 trillion worth of value has evaporated in just over six months. This means investors have less money to throw at speculative assets like Dogecoin — which is often traded for other cryptocurrencies on decentralized exchanges (a type of blockchain-based trading platform where users can buy and sell digital assets). In the mainstream economy, the Federal Reserve is entering a tightening cycle by increasing interest rates and reducing its balance sheet. These moves can lower the availability of capital and liquidity in the market, reducing investor appetite for risky assets.
Dogecoin’s design is outdated
Over the long term, macroeconomic challenges related to inflation and liquidity will likely resolve. But competition could cause Dogecoin to continue lagging behind its peers, even in a future cryptocurrency recovery.
Since its 2013 launch, more meme cryptocurrencies have entered the market — often copying Dogecoin’s dog-based branding and relationship with Elon Musk. Most recently, Shiba Inu (currently the 16th-largest cryptocurrency) enjoyed an over 60,000,000% rally in late 2021 following a series of Musk tweets presumably intended to boost Dogecoin.
And while most rival meme coins are unlikely to retain their long-term gains because they face the same shortcomings as Dogecoin, they highlight the asset’s poor economic moat and lack of differentiation. Further, some of these new rivals boast technical advantages.
Unlike Dogecoin, which serves primarily as a way to store and transmit value, Shiba Inu is attempting to create its own meme-coin ecosystem. This includes ways for investors to earn passive income by locking up their tokens in return for new ones (a process called staking). Shiba Inu is also working on a metaverse project designed to allow its users to create and enjoy gaming experiences on its network.
There are better ways to bet on a rebound
With the cryptocurrency industry down significantly in 2022, Dogecoin isn’t the only asset feeling the pinch. However, the iconic meme coin faces specific challenges that could cause it to underperform peers during the bear market and possibly lag during a future recovery. There are better ways to bet on a cryptocurrency rebound.