- You know an investment is somewhat unconventional when the Know Your Meme website is the main source of background information.
But even in the turbulent world of cryptocurrencies, Dogecoin is seen as a pretty wild creature. It was launched in 2013, inspired by a short-lived online craze for pictures of a particular Japanese dog breed. Last weekend, however, it nearly doubled in value and is now worth more than $2bn (£1.5bn). Dogecoin had been gaining steadily all through December, but the latest spike has prompted howls of “crypto-hype” from sceptics. Granted, it’s still well behind the biggest beast in the digital currency pack, Bitcoin, which has a total value of more than $270bn. But given that Dogecoin was initially intended as a parody of the Bitcoin boom, its founder, Jackson Palmer, is none too happy now that it has slipped its leash.
“The fact that most conversations happening in the media and between peers focus on the investment potential is worrying,” he said earlier this month.
Until its recent rise in value, Dogecoin was little known beyond a small coterie of geeks. But in sporting circles, the cryptocurrency’s backers have gained a reputation for some unorthodox sponsorship choices. In 2014, US stock car racing became a surprise beneficiary, when members of the Dogecoin community decided to give a helping hand to Nascar driver Josh Wise, donating $55,000 worth of the digital currency. That same year, Dogecoin backers raised $25,000 to send the Jamaican bobsleigh team to the winter Olympics. Sporting underdogs have clearly done well out of Dogecoin, but what about investors? Will they be barking up the wrong tree if they buy into the currency?
Well, one thing to bear in mind is that dogecoins are far more numerous than bitcoins. The rules underpinning Bitcoin say that only 21 million bitcoins can be created – and that figure is getting ever nearer. It is unclear what will happen to the value of bitcoins when that limit is reached. Dogecoins are “mined” in the same way as bitcoins – that is, they are created using computer processing power. However, unlike Bitcoin, there is no upper limit on the number of dogecoins that can be produced, with a staggering 100 billion already in existence. That helps to explain why each dogecoin is currently worth less than two US cents, while Bitcoin’s peak value to date was nearly $20,000.
Common sense tells us that scarce commodities are more likely to hold their value than plentiful ones. But in the world of cryptocurrencies, common sense is perhaps a poor guide to future behaviour. And in the world of economic experts, there is still widespread scepticism about any and every form of cryptocurrency. Prof Ethan Ilzetzki at the London School of Economics told the BBC: “A digital unit of currency has no intrinsic value unless it can be used in transactions, and I cannot name a single cryptocurrency that is more useful in transactions than a credit card that’s denominated in dollars or pounds or yen.
“There’s nothing inherently wrong with privately provided digital currencies, but they need to be well designed and well thought out.
“They’re worth a lot because people say they’re worth a lot. I have very little confidence that they have any long-term value.”