Dogecoin (CRYPTO:DOGE) has had one heck of a year so far. This month alone, its price is up nearly 700%. Since the beginning of the year, its soared more than 8,500%, as of this writing.
Its hard to ignore those types of returns, and many investors are scrambling to jump on the cryptocurrency bandwagon in hopes of getting rich. While its possible that some investors could make a lot of money with Dogecoin, its not right for everyone.
If youre considering investing in Dogecoin, be sure youve done your homework first. Theres one reason you may want to invest and two reasons to avoid it entirely.
Image source: Getty Images.
Why invest in Dogecoin
1. You have cash to spare and are willing to gamble with it
If you had invested $1,000 in Dogecoin on Jan. 1, 2021, youd have approximately $85,000 today. The cryptocurrency has been unpredictable up until now, so its anyones guess how high the price will climb. If youre lucky, you could potentially make a bit of money by investing now.
Keep in mind that theres very little chance Dogecoin will make for a solid long-term investment. So, if you choose to invest, think of it as an experiment just for fun. Only invest money you can afford to lose, and go into it with zero expectations. If Dogecoins price continues to climb, thats great. But dont be surprised if you lose more than you gain.
Why avoid Dogecoin
1. Its fundamentals arent as strong as other currencies
There are many different types of cryptocurrencies, and its easy to lump them all together and assume theyre the same. However, investing in Dogecoin is very different from investing in a more established digital currency like Bitcoin (CRYPTO:BTC).
Dogecoin was created as a joke in 2013. Though it has experienced real gains since then, its not nearly as strong as other currencies.
For example, one reason investors are attracted to Bitcoin is that there are only 21 million tokens available. A limited supply of the cryptocurrency increases its value, and some experts refer to Bitcoin as digital gold. Dogecoin, on the other hand, has 129 billion tokens in circulation. With so many tokens available, that reduces its value.
In addition, very few merchants accept cryptocurrency in general. But the ones that do are more likely to accept Bitcoin than Dogecoin. Without widespread adoption, it will be difficult for Dogecoins growth to be sustainable.
Finally, there isnt much that sets Dogecoin apart from its competitors. Bitcoin has the longest track record and the most name recognition, giving it an edge. Ethereum (CRYPTO:ETH) is the second-most popular cryptocurrency after Bitcoin, and its blockchain technology is used for non-fungible tokens (NFTs) and decentralized finance -- giving it an advantage outside of cryptocurrency. And lesser-known cryptocurrencies like Litecoin, Nano, and Stellar have lower transaction fees than Dogecoin.
All this is to say that Dogecoin doesnt have a competitive advantage in the crypto space, which means it will be difficult for it to grow over the long run.
2. Its likely the bubble will burst soon
Given the fact that theres nothing about Dogecoin to warrant its phenomenal returns over the past few months (other than celebrity endorsements and internet hype), all signs point to a bubble that will burst sooner or later.
Dogecoin is not all that different from stocks like GameStop and AMC -- companies that saw their stock prices explode essentially overnight, even though their business fundamentals didnt warrant that type of growth.
Similar to GameStop and AMC, Dogecoins meteoric rise is mostly due to retail investors hyping it up online, fueled by celebrities like Elon Musk promoting it on social media. And like GameStop and AMC, its likely only a matter of time before the Dogecoin bubble bursts.
While theres a chance Dogecoin could become a real player in the crypto space, its more likely it will crash and burn. If you have cash to spare and are curious about investing for fun, it doesnt hurt to put a little money toward Dogecoin -- after all, you never know what might happen. But there are plenty of other investments out there that are far better options.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.Katie Brockman has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Bitcoin. The Motley Fool has a disclosure policy.>
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