Cryptocurrency is a flashy investment, but is it worthwhile? Everything you need to know to invest in Dogecoin (without risking a fortune).
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A dollar is a dollar is a dollar. So is a euro or a renminbi. (Maybe a ruble isn't these days, but a ruble is still a ruble.)
We refer to these things a currency, and they have several important characteristics. In principle, they all boil down to one essential feature: you can reliably use them to pay for things.
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. In practice, 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.
Everything You Wanted to Know about Cryptocurrency (but were afraid to ask)
As alluded to earlier, currency has several essential features.
It's durable, in the sense that it doesn't wear out meaningfully over time. Where a bushel of apples may rot or get chewed on by bugs, a pile of silver dollars stays a pile of silver dollars.
It's portable. You can fold up a cashier's check and put it in your pocket, but it's much harder to carry around a 300-acre golf course.
You can divide it into smaller amounts. You can represent a dollar in terms of four quarters, twenty nickels, a hundred pennies, ten dimes, two half-dollars, et cetera. You can make change for any transaction smaller than a dollar. Try doing that if you're paying for things with a single cow!
It's uniform or fungible. Unless you have one of those dollar bills with a funny drawing on it, one dollar bill is the same as any other. What if you're trying to pay someone in eggs, and they want ostrich eggs and you have duck eggs? Or they want free-range jumbo chicken eggs and you only have cage-free eggs?
It doesn't grow on trees, the supply is limited. This is why we don't use leaves as currency.
People accept it as payment. It does no good to be the world's top holder of little pieces of paper with the face of Emperor Norton on them unless you can buy a really good meal with them, for example.
Cryptocurrency addresses some of these things, but more importantly it has other characteristics.
It promotes non-reversible transactions. You can't spend the same dollar twice, but a sneaky criminal could forge a check and buy multiple physical goods before everyone figures out what happened.
It has a public ledger of transactions. While you can look at a coin and see the city where it was minted and the year of striking, you can't tie it all the way back to the moment it rolled off the conveyor belt. In cryptocurrency, every element of every transaction can always be traced back to its origins.
It's decentralized, in that there's no single entity responsible for managing the currency. There's no US Treasury printing money. There's a network of computers all working together to verify the state of the currency supply with every transaction.
With that said, cryptocurrency isn't always accepted as payment or durable in an important sense.
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. What if investing is the wrong way to think of crypto though?
For example, in June 2020, El Salvador voted to accept Bitcoin as legal currency, even using geothermal power to mine coins. The distinction between an investment and currency is nuanced, but if you think about an investment as "a store of value", investing in something you can pay taxes in is pretty useful.
Everything You Need to Know About Where Cryptocurrency Comes 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
- It can take a lot of electrical power to generate that 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.
Invest in Dogecoin 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 $35,000 a share and sell at $40,000 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? 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.
In March 2021, Bitcoin sold for $48,000 apiece. Doge sold for $0.05. By June, Bitcoin had slipped to $35,000 and Doge had risen to $0.30. By March 2022, Dogecoin traded around $0.12 per coin and Bitcoin $38,700 per coin.
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 thousands of 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 / Doge as Currency
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, or 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 measurable 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.
Implications of Doge as Transfer
What happens if Dogecoin becomes a popular mechanism for transferring money online? Alternately, what needs to happen?
Unlike Bitcoin, Dogecoin:
- Has a growing supply. There's currently a fixed number of Bitcoins that can ever exist. There's no limit to Dogecoin; the number can grow year over year at a fairly well understood rate.
- Has a resulting price cap. Yes, Dogecoin increased in value thousands of percent since 2019, but that reflects growing demand, not limited supply.
- Has fewer holders and miners. This reflects Bitcoin's first-mover advantage, but it can change.
- Has lower transaction fees, and they're going to get lower. You can pay for a Dogecoin transaction with fractions of a penny and expect it to go through, instead of potentially hundreds or thousands of dollars for Bitcoin or Etherium.
- Requires a fraction of the work to settle transactions and uses less power to mine
- Has a block of transactions confirmed every minute or so instead of every 10 minutes or more for Bitcoin. With every confirmation, you're more and more certain that your own transaction can never be reversed. After 10 minutes, you're 100x more confident with Dogecoin than you would be with Bitcoin.
- Lacks the buzz of Bitcoin, so it's probably (hopefully!) used much less often for money laundering between transnational crime syndicates
- Lacks the buzz of Bitcoin, so it's less unstable because fewer people are speculating on it.
If you'd mined a few million Dogecoin when it first came out, you'd have a nice chunk of value now (and it's probably going to grow in value in the future), but the days of 10000% returns may be gone. Instead, the most important part of Dogecoin is probably how it will be used in the future: as a transfer mechanism, especially for things like small or recurring payments.
For example, one of Trendshare's developers has created a proof of concept subscription event system built on Dogecoin called If Doge Then Wow, which uses Dogecoin payments to trigger actions such as subscribing to a paid service, sending custom notifications, toggling connected internet of things devices, etc.
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).