This could be the most successful joke of all time.
The cryptocurrency dogecoin (DOGE) is in the middle of a historic boom. Its price has soared more than 10,000% since the start of the year… including a 600% surge over the past month.
It’s generating headlines across the financial media. It’s also upsetting a lot of people.
Whether you own dogecoin, there’s an important lesson here for every investor.
But first, let’s take a moment to recap this “joke” cryptocurrency.
It was created in 2013 by two software engineers. They wanted to make a “joke” version of bitcoin. So they based their coin on “doge”—a popular meme featuring a Shiba Inu dog.
Dogecoin may have started as a joke… but it’s now a giant in the crypto space. Its market cap currently sits around $62 billion, making it the fourth-largest cryptocurrency in the world behind bitcoin, ethereum, and binance coin.
Dogecoin’s historic rise rubs a lot of folks the wrong way. After all, it’s not supposed to be a “legitimate” cryptocurrency.
Unlike many coins, dogecoin doesn’t have a fixed supply. In other words, there’s no cap on how many dogecoins can be created over time. Dogecoin’s creators originally had a 100 billion cap on its supply. But they removed the cap in 2014 to encourage people to use the coin instead of simply holding it.
There are currently just under 130 billion dogecoins in circulation. They’re mostly used for tipping on the internet through social media platforms like Reddit and Twitter. But a handful of businesses also accept dogecoin as payment.
Dogecoin also has some notable celebrity endorsements. Two of its biggest supporters are Mark Cuban and Elon Musk.
Cuban, the owner of NBA’s Dallas Mavericks, talked about dogecoin during a recent appearance on the talk show Ellen. He noted its relatively cheap price (around $0.25 at the time) and said, “If you go and spend $5, $10, $15… that’s a better investment than buying a lottery ticket. And you know what? It could go up!” He also noted the Mavericks accept dogecoin.
Elon Musk often tweets about dogecoin to his 50 million-plus followers on Twitter. And it even came up when he hosted Saturday Night Live last week.
At this point, you might be wondering what makes dogecoin special. There must be something in particular that attracts folks to it, right?
The truth is: not really. That’s what drives the critics crazy. There’s no good “reason” for dogecoin’s surging value… other than its popularity. I’d argue it’s no different than the Pet Rock craze of the 1970s or the Beanie Babies bubble during the 1990s. Skeptics point out that since there isn’t a limited supply, there’s nothing to support the value.
However, dogecoin’s supporters, like Musk and Cuban, point out that it offers the same benefits as any peer-to-peer cryptocurrency. Some call it “the people’s money.”
Why does any of this matter?
It’s a great example of the power of speculation.
Dogecoin offers unlimited upside (at least, in theory). In other words, you can only lose 100% of your investment in dogecoin… but you could (hypothetically) make thousands of percent in gains.
And in today’s world, when things go viral and celebrities encourage demand for an asset… that could translate into an absolute fortune. Dogecoin’s 10,000% gain this year is proof that it can happen.
The main point is this: When it comes to speculative investing, whether an asset has actual value doesn’t really matter… If investors are intrigued enough to buy it, they’ll continue to send its price higher.
The downside, of course, is that you have no way of knowing whether a speculative asset will actually succeed… or lose all of your invested capital.
I have no position in dogecoin. But I’m enjoying the show.
And I have to tip my hat to anyone who bought dogecoin earlier this year. It’s a risky asset, but I’m glad folks are making massive gains.
I expect some people will end up losing money on dogecoin. But that’s the reality of speculating. If you’re going to invest in dogecoin or something similar, make sure you use proper position sizing. Put simply, don’t invest more than you’re comfortable losing.
And even if you don’t own dogecoin… you have to admit, it’s fun to watch.
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