Cryptocurrency is a flashy investment, but is it worthwhile? How to buy, sell, trade, and get Dogecoin (without risking a fortune).
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A dollar is a dollar is a dollar. So is a euro or a renminbi.
When is currency something else? When it's cryptocurrency: a digital-only unit of financial transactions backed by no sovereign government and relying on cryptographic identity for verification and validation.
That's a mouthful, but essentially cryptocurrency like Bitcoin, Etherium, or Dogecoin is a virtual currency you can buy, sell, create, or use to buy and sell other things.
Is it worth investing in? That depends.
What is the Value of Cryptocurrency?
What is the value of a dollar? It's like the value of a gold or silver bar. It could increase or decrease over time, but the real value is what you can buy with it.
(Wait, a dollar can increase or decrease over time? Yes—that's deflation and inflation, among other things.)
Unlike a business where you can analyze things like free cash flow, the value of a unit of cryptocurrency like a Bitcoin/Satoshi depends on what other people are willing to buy or sell it for, whether that's dollars or pounds or whatever. Each unit of crypto is just an entry in an electronic ledger. It can't generate value on its own. It only generates value when it's traded.
Should a value investor invest in crytpocurrency? Not as a big part of your portfolio.
Where Does Cryptocurrency Come From?
This is how Bitcoin and similar systems work.
Cryptocurrency comes from math. Specifically: cryptographic math. Because cryptocoins are stored in a public ledger distributed among many, many machines, it's essential to verify that every copy of the ledger is identical and that no attacker can forge a ledger entry and force everyone else to accept it.
It takes a lot of computing power to prove that each new ledger entry is accurate, so the computer that does so gets a little bonus payout in the currency. This is known as mining. Every Bitcoin/Litecoin/Dogecoin in the world that's created starts from this mining operation.
If you want to buy one of these coins, you'll have to buy it from someone who mined it at some point in the past.
Is it Smart to Mine Cryptocurrency?
The problems with mining cryptocurrency are:
- You're competing with lots of other people
- You're competing to find a needle in a haystack
- It takes a lot of computing power
- You can't predict what your payout will be
If you go this route, you'll discover that people have thrown lots of money into the problem, even going as far as to design and build and run custom computer hardware solely for the purpose of generating coins. This has become a sort of computing arms race, where you have to keep investing money to keep up with everyone else.
If you're starting to see an investing opportunity in selling this hardware or related services, you might be onto something.
Investing without Mining
Savvy investors have already started to realize there's another way to get these cryptocoins. Initial miners want dollars and people with dollars want coins, so exchanges like Coinbase (referral link; gives you $10 in Bitcoin on deposit) eventually opened, where you can buy, sell, and trade cryptocurrencies for other cryptocurrencies or for currencies in general.
That's not the only place to buy and sell though.
Thanks to ETFs like BTC-USD and DOGE-USD you can trade Bitcoin, Dogecoin, and other cryptocurrencies as if they were other securities. In other words, you can buy into the Bitcoin ETF at $48,000 a share and sell at $49,000 a share without mining or finding someone to sell you Bitcoins.
In this case, you can speculate on price moves of the underlying component without having to shell out for expensive hardware on your own.
Dogecoin Sounds Weird
What is Dogecoin exactly?
It's a joke that's gotten out of hand.
Back in the day, a photogenic Shiba Inu named Suki became a meme, with "doge" as the misspelling of "dog". Dogs can't spell, and a Shiba Inu is friendly and helpful, so the meme spread with the dog exclaiming many wonderful phrases of wonderment.
Fast forward to the dawn of cryptocurrency, when the only Bitcoin holders were miners who were super excited about things, a programmer named Billy Markus created Dogecoin as a joke to mock the exuberance of the other crypto fans.
The joke turned real.
That's why you can buy Dogecoin Doge (doge is the name of a unit of dogecoin) on cryptocurrency exchanges such as Coinbase and even buy shares in the DOGE-USD fund.
Is it serious? Entrepreneurs such Elon Musk and Marc Cuban have voiced some support for it (though you can never quite tell with those two whether they're joining in on a winky Internet Irony session or really strong believers in something).
Here's the good news, though. Dogecoin isn't inherently more or less risky than Bitcoin or any other cryptocurrency. Because it's backed by the fiat belief of everyone who's interested in it, it doesn't reflect any underlying value. It's not like a lemonade factory that has inventory and equipment and a sales process. It's just a bunch of numbers associated with each other.
As of this writing in March 2021, Bitcoin sells for $48,000 apiece. Doge sells for $0.05.
Experienced investors know that the value of a security reflects what people believe about it, so Doge doubling is about as likely as Bitcoin doubling. But it's a lot easier to get into Doge right now. $100 buys you 20,000 Doge and a fraction of that in Bitcoin.
If you have a good brokerage set up, you can start trading now.
Crypto is More Than Investing
Of course, the other value of a cryptocurrency is as a unit of transfer. Think of the difference of buying an ETF that invests in gold bullion versus buying a gold coin. Sure, having a gold coin is cool but you can trade it to someone else who wants it for lots of reasons, not because it represents a gold bar stored in a vault somewhere.
Sure, buying Doge makes a virtual Shiba Inu Dog somewhere happy. But you can also buy things with it, send it to other people, receive it on your own.
For example, a crypto faucet called Rollercoin (affiliate link; get a bonus for signing up) uses the lure of earning multiple cryptocurrencies to build up a marketplace with its own custom currency. While it's structured as a game with a thin narrative over mining, you can earn tiny fractions of coins by playing little games.
This may represent a significant change in how we think about money in the future. Playing a game on Rollercoin, helping train a machine learning algorithm to recognize images for Google, summarizing an article for Facebook—these are all activities you can do in a couple of minutes that provide measureable value that you can't account for if you pay a few cents per minute. The transaction costs for sending money via credit card, direct deposit, or other traditional mechanism make it unworkable. Peer to peer digital currency has some advantages.
Sending $1 here and there via cryptocurrency is a lot easier though. That's one of the things it was made for.
If you create a Dogecoin wallet, you can send and receive payments in whatever size you want.
To send, open your wallet, go to the Send option, and enter an address such
DFhv7MMnDBGeaNmKybvfwF3HaJxN3Dtg3y. Choose what you want to
send, and you're off!
Similarly, to receive, generate an address of your own, give it to the sender, and wait for the transaction to work its way through the ledger.
Should Value Investors Play with Dogecoin
While Bitcoin and other currencies have all the buzz, Doge's semi-joke status makes it more interesting. It's probably not going to make anyone rich at this point.
For testing purposes, throwing in a couple of hundred dollars of fun money can help you figure out the basics. Cryptocurrency may never replace the dollar or other nationally-issued instruments, but the enforced artificial scarcity represented by mining, the fractional transfers, and the globally-public and crytpographically secure ledger are unique features that dollars can't provide on their own.
Don't buy Bitcoin or buy Doge as the main part of your portfolio, but don't be scared away by the newness. Understand the value of this digital currency (but be aware that the people who are going to get rich are probably the ones selling to the miners, as always).