by Nathalie Janson, Associate Professor at NEOMA Business School
After the unstoppable increase of Bitcoin (BTC) since January – it added 10 000$ to its price every month since January reaching 60 000$ in April 2021 – it is now the turn of the Dogecoin to be the next cryptofrenzy.
This crypto created in three hours by Billy Markus as a joke to make fun of the Bitcoin community back in 2013 had no specific use except federating crypto geeks sharing the same sense of humor. Its capitalization quickly reached 60 million USD back then. This is why until Tuesday, April 13th 2021, its price was closed to 0 since cryptos value derives from their usefulness.
The Dogecoin belongs to the family of Altcoins using proof of stake to validate transactions – more flexible and fast compare to Bitcoin and Ether based on proof of work – but essentially not as decentralized and secured. So far Dogecoin has mainly been used for tipping creators of content or more interestingly to noble causes. These include raising funds for the bobsleigh Jamaïcan team to send them to the Winter Olympic Games in 2014, paying back victims of Dogecoin hack in the early days after its creation, and raising funds to provide access to drinkable water in Africa.
Dogecoin… a billionaire maker joke
How comes the DogeCoin price surged in such irrational manner? Is this move another proof of market madness? A sign that we might be close to the next burst of the crypto bubble? Who knows? … Why is it so difficult to understand the pricing dynamic of cryptocurrencies? You might think that what we experienced is the paroxysm of futility. In a week, some Dogecoin holders become billionaires, the price of the Dodge coin increasing from almost 0 to 43 cents at its highest. How mad that sounds? Similar to what happened to Gamestop, we are dealing with a community with a strong identity – the Dogecoin joined by new members like Snickers – the sweet bar and more importantly by Elon Musk – who wants to set a record and claiming April 20th being DogeDay with the clear goal to push Dogecoin up to $1. They are encouraging each other to buy more of the coins. Given the limited size of the market dominated by “whales” – five “whales” are said to control 40% of the market – the increase in purchases of Dogecoin leads to significant rise in price given the low liquidity.
The Dogecoin case is an emblematic case showing how subjective value is in economics. Indeed, like Bitcoin, the price of Dogecoin only depends on its acceptance that in itself depends on the size of its network that suddenly increased.
Why now? First, Elon Musk started to show his interest in the Dogecoins by tweeting about it. Why does Elon Musk opinion matter? Because he symbolizes the success story of a man who is a visionary. After all, if Elon Musk invests in Bitcoin and supports Dogecoin it must be for a reason, and he may be right like he has been right about the industrialization of electric cars as the success of the Tesla demonstrates. He performs a role similar to leading investors in traditional financial markets like Warren Buffet.
Secondly, the Coinbase initial public offering contributed to a rally in the cryptocurrencies market, with no exception for the Dogecoin. Over the week-end, the major cryptocurrencies – BTC and Ethereum dropped for technical reasons due to a sharp decrease in the hash rate after an electricity shortage in the Xinjang province in China. When that happens, it usually benefits altcoins.
More broadly speaking, the crypto market is frenetic since the beginning of the year. This frenzy is a symptom of a global economy that is still suffering from severe restrictions in some activities but at the same time is also experimenting acceleration in others. Combined with overgenerous monetary policy feeding liquidity in search of profitability away from traditional markets because of low interest rates and over rated stock markets, this is a perfect combination for investors to try anything new to boost their portfolio return if you add on the top of that, growing concerns about the return of inflation in the US.
In this context how long will the Dogecoin rally last? This essentially relies on the determination of its fans to support it but after a while, it will need to be more than a symbol!
