Dogecoin (DOGE 1.67%) might be a cryptocurrency that was created as a joke based on a 2013 meme of a shiba inu, but it's also returned more in just a few months than the S&P 500 has in at least 30 years.
As of April 20, Dogecoin was up in an incredible 6,560% year-to-date, and its market cap had reached $50 billion, making it more valuable than well-established blue-chip companies like Ford. It would be easy to dismiss Dogecoin as a speculation-driven frenzy that's led to a massive bubble, but there's more to the story than that. Indeed, Dogecoin is one of several such assets this year to have gone parabolic, including larger cryptocurrencies like Bitcoin and Ethereum, meme stocks like GameStop (GME +2.01%) and AMC Entertainment, and even "non-fungible tokens", which have seen prices of as high as $69 million for digital artworks. These are all variations of the same theme, and a reminder that not every asset price is determined by fundamentals.
Image source: Getty Images.
The power of a meme
What the assets above all have in common is that their growth has been powered by memes. Groups of traders on social media platforms like Reddit and others pump up these assets, and as their prices rise they attract more traders, who then send the prices up even more in a feedback loop. The meme traders often decide on an arbitrary price target, and then try to pump up a stock or a cryptocurrency to reach it. For example, a number of Bitcoin backers have changed their Twitter profile pictures to include laser rays in their eyes in solidarity with the phrase, "Laser rays until $100k," meaning $100,000. There's no deeper meaning to this. It's simply a meme -- a way of collectively supporting a mission to pump the price of a bitcoin to $100,000.
If this sounds juvenile or stupid, that's because it kind of is. But assets prices don't need fundamental reasons to move, and it's a mistake to underestimate the power of such herd behavior.
Similarly, the anticipation of "DogeDay," which was April 20, has coincided with a mission among Dogecoin holders to send the price of the coin up to $1. The image below is one of many popular Dogecoin memes on social media.
Image source: Twitter.
Dogecoin's rise has also been supported by the successful direct listing of Coinbase, the leading cryptocurrency trading platform, and celebrity endorsements on social media. Tesla CEO Elon Musk has been a steady backer of Dogecoin, touting it as his favorite cryptocurrency, and his posts have at times led to spikes in its value.
Dogecoin is the people's crypto
-- Elon Musk (@elonmusk) February 4, 2021
SpaceX is going to put a literal Dogecoin on the literal moon
-- Elon Musk (@elonmusk) April 1, 2021
No business leader better understands the power of memes or straddles both business and meme worlds better than Musk, who renamed himself the Technoking of Tesla and his CFO as the Master of Coin. Tesla itself exhibits some of the characteristics of a meme stock. There were fundamental reasons for the stock's surge last year, but Musk's cult-like following and his ability to attract attention on social media also helped. In a virtuous cycle for Tesla stock, the business case for the EV-maker and the loyalty from meme traders reinforce one another.
Dogecoin also has other celebrity backers like Snoop Dogg, Mark Cuban, and Gene Simmons, which has helped distinguish it from other "alt-coins."
A lasting trend
The meme stock mania led by GameStop took the market by storm in January, shocking veteran investors. The sudden rise of the video game retailer stock was both a brilliant strategy by a group of Reddit traders successfully executing a short squeeze and gamma squeeze, and an obvious bubble. Shares hit a peak of $483 on Jan. 28 before sinking to $40 just a few weeks later. But then something surprising happened. The stock surged again, reaching $348.50 on March 10, in what was mostly another meme-based rally. Today it trades around $150, which is still up 2,500% from where it was at the start of 2020. Meanwhile, other meme stocks like AMC Entertainment have surprisingly held their value as well even when their business fundamentals are atrocious.
While penny stocks are known for such pump-and-dump movements, none has ever reached anything close to a $50 billion market cap like Dogecoin has, and the trading volume Dogecoin and other meme stocks has seen is orders of magnitude larger than those of penny stocks. Trading platforms have had to temporarily pause trades in such assets as demand to trade them has been so high.
The Dogecoin rally could end up being a bubble, and it exhibits many of the characteristics of an asset bubble, but meme investing could also be a lasting trend, as traders who have won big on such investments are likely to keep investing this way. Similarly, memes aren't going away, and will remain a cornerstone of internet culture, including on social media boards like WallStreetBets that day traders favor. Those internal portals have gained significant influence in recent months thanks to the rise of meme stocks, and as the millennial generation comes to makes up a greater percentage of investors, meme investing could continue to gain salience.
Investors should remember that long-term, buy-and-hold investing is the best and lowest-risk way to make money in the stock market, but what's happening with Dogecoin and other meme trades look like more than just a typical asset bubble. It could represent a cultural shift in stock trading, and that is likely to have spillover effects, including increased volatility, on the rest of the stock market.
Dogecoin's price isn't a reflection of any fundamentals, but simply the power of its meme. The higher the price goes the more powerful the meme becomes, and by extension so do other meme investments.
Like gold, art, and other cryptocurrencies, not all assets are valued on fundamentals. Some are simply worth whatever people will pay for them. As meme investing gains popularity, the stock market is more likely to exhibit those traits as well.
