Dogecoin (DOGE -0.89%) was created as a joke, taking its name from a meme made popular in 2013. The meme in question featured a shiba inu (dog) paired with various humorous captions. Despite this whimsical origin story, Dogecoin has surged almost 500% in the last month. But even well-established cryptocurrencies like Bitcoin are very risky investments, and if anything, Dogecoin looks even riskier.
Rather than gamble on this cryptocurrency, investors looking for a high-risk, high-reward opportunity should consider buying Roku (ROKU -10.29%). Unlike Dogecoin, this tech company's value is backed by more than speculation. Here's what investors should know.
The problem with Dogecoin
The U.S. Securities and Exchange Commission (SEC) divides assets into many classes. The most common three are stocks, bonds, and cash, but others like real estate and commodities exist as well. One of the biggest problems with Dogecoin (and other cryptocurrencies) is trying to define them based on these traditional asset classes. That matters, because it will determine how cryptocurrencies are regulated in the long run.
Image source: Getty Images.
So is Dogecoin a type of cash (or currency) as the name implies? That category doesn't really work. Fiat currencies like the U.S. dollar are backed by the issuing government. But by definition, cryptocurrencies like Dogecoin are decentralized, meaning they're not issued or controlled by any government or regulatory authority. Moreover, Dogecoin's price is highly volatile, and the tokens are difficult to spend in the real world. Those are not ideal qualities for a currency.
That's why the U.S. Commodity Futures Trading Commission (CFTC) classifies all virtual currencies as commodities. But even that choice doesn't quite fit, either. By legal definition, commodities are tangible goods, and virtual currencies are not tangible. To solve this problem, the IRS treats cryptocurrencies as property. And while that seems like the most fitting option, it still doesn't justify the $9.1 billion market capitalization that Dogecoin has achieved, nor does it explain the wild fluctuations in price that can be measured over hours.
Presently, many individuals are trading Dogecoin and other cryptocurrencies like securities (stocks or bonds), buying into momentum in the hopes that the gains continue. But securities have value because they're backed by a third party whose effort "drives the expectation of a return," according to the SEC. For instance, bonds have value with the backing of the wealth of the issuer, and stocks have value based on the assets and revenue of an enterprise. Dogecoin, on the other hand, isn't backed by anything. In fact, the SEC has already determined that Bitcoin and Ethereum do not constitute securities.
Finally, unlike Bitcoin -- which is limited to 21 million tokens -- Dogecoin is infinite and is therefore no more scarce than air. Put bluntly, Dogecoin's value is based on nothing more than speculation. The investment thesis boils down to hope, and the price of a token on any given day is based on chance.
A better way to invest
Rather than gambling on Dogecoin, investors should consider buying into high-quality companies with a competitive advantage and a long-term ability to create value.
Roku checks all of those boxes. As the market-leading streaming platform in the U.S., both in terms of streaming hours and active users, Roku has an edge over the competition. More importantly, this edge strengthens over time as Roku's user base expands -- that should be instrumental in helping this tech company outperform rivals and create value for shareholders. Dogecoin lacks any such advantage or value proposition.
Likewise, Roku's long-term value is based on the company's ability to generate revenue. That in turn is directly affected by the durability of Roku's advantages and the size of its market opportunity. And according to eMarketer, the digital advertising market is expected to reach $389 billion this year. In other words, Roku has the potential to capture incredible value going forward. Moreover, the company's fast-paced sales growth is measurable evidence of its ability to execute on this opportunity.
Data by YCharts.
In the years ahead, Roku's top-line growth will continue to be a primary determinant of the company's value. And that's what separates it from cryptocurrencies like Dogecoin. Roku's value is based in part on the efforts of the company, while Dogecoin's value has no such foundation.
A final word
By definition, investing involves a trade-off of potential risks and possible rewards. It's natural to feel left out when you watch from the sidelines as an asset skyrockets in value, which is exactly what's happened to Dogecoin over the last month. But jumping on board, because everyone else is doing it is not a good investment thesis.
Instead, investors should focus on finding quality businesses that create value in the real world. Roku is a good example. The company helps millions of people tune in to their favorite movies and TV shows, and as a result, Roku generates revenue and has accumulated assets. In other words, if Roku closed its business tomorrow, the assets would be distributed to stakeholders. But if Dogecoin winked out of existence, coin holders would be entitled to nothing.
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.
