Bitcoin (BTC 1.00%) and Dogecoin (DOGE 0.67%) have both been in the spotlight lately, and for good reason. In the past year, Bitcoin's price has jumped over 600%, but Dogecoin has surged an incredible 2,400%. In other words, $40,000 invested in Dogecoin one year ago would be worth $1 million today.
But those impressive gains are in the past -- which one is the better buy right now?
Bitcoin and Dogecoin have one big thing in common: They are both based on blockchain technology, an ingenious peer-to-peer record-keeping system designed to be highly transparent and secure, and widely distributed. To understand why that matters, it helps to know how cryptocurrency mining works.
In the simplest terms, all transactions that occur on the Bitcoin (or Dogecoin) network are incorporated into batches called blocks. Miners use powerful computers to validate these blocks -- a process that involves solving a complex math problem. Once the problem is solved, the miner earns cryptocurrency and the validated block is added to the blockchain (i.e., the permanent record of all previous transactions).
This makes Bitcoin and Dogecoin decentralized currencies. Miners earn tokens for solving blocks, and after all other nodes (computers) in the network verify the solution, the block is added to the blockchain. In other words, no central banking authority is needed to issue or keep track of the currency. The network takes care of both on its own. That differs dramatically from fiat currencies like the U.S. dollar, where a central banking authority plays the role of issuer and record-keeper.
Moreover, because all nodes must be in consensus, it's virtually impossible to attack the blockchain network or falsify information. In fact, a person would need to control 51% of the computing power on the network to accomplish this -- that's beyond unrealistic.
Despite these similarities, Bitcoin and Dogecoin have a few key differences. And those differences have big implications for their long-term prospects.
First, Dogecoin is currently infinite. That means miners can continue to solve blocks and earn new Dogecoin forever. By comparison, Bitcoin is limited to 21 million tokens, 18.7 million of which already exist. That's because every 210,000 blocks, the Bitcoin earned for solving a block is cut in half. In other words, at some point in the future, the reward will effectively be zero. And after that time, Bitcoin miners will only earn transaction fees.
Similar to gold and other precious metals, this scarcity should make Bitcoin more valuable than Dogecoin. But Bitcoin also has another advantage. It is the most widely adopted and most valuable cryptocurrency. That may sound trivial, but it actually matters a great deal.
As of January, there were over 4,000 different cryptocurrencies in existence. And whether you believe any of them are smart investments or not, it's hard to deny the fact that 4,000 different currencies creates a lot of complexity. In other words, I believe the majority of value will be consolidated into just a few of these tokens over time. And Bitcoin's massive lead virtually ensures that it will come out ahead of Dogecoin.
A final word
Investors should remember that both Bitcoin and Dogecoin have been highly volatile investments. For instance, Bitcoin lost over 80% of its value from December 2017 to May 2018. So if you decide to invest, do so knowing that rapid price fluctuations come with the territory.
Investors should also be aware that there are smart people on both sides of the cryptocurrency debate. People like Cathie Wood (Ark Invest's CEO) and Jack Dorsey (Square's chief executive) are big advocates of Bitcoin, while institutions like Goldman Sachs have expressed skepticism and global economist Nouriel Roubini called Bitcoin "the mother of all scams."
That said, the question is which one is the better buy, not whether either is a good buy. And from that perspective, Bitcoin has several advantages over Dogecoin: It is more scarce, more popular, and more valuable. That's why Bitcoin wins this contest.