The price of Dogecoin (DOGE 7.47%) has plummeted by nearly 40% since its peak in mid-May, the latest in the wild roller-coaster ride the cryptocurrency has been on since the beginning of the year.
Dogecoin originally started as a joke back in 2013, but it's caused real waves in the investing world. Since the beginning of this year, Dogecoin's price has soared by nearly 6,000%. Over the past 12 months, it's up by more than 13,000%.
Cryptocurrency, in general, has experienced explosive growth over the past few months. But Dogecoin's returns have been truly spectacular, outpacing those of even the biggest names in the industry, Bitcoin (BTC 0.43%) and Ethereum (ETH 0.19%). Bitcoin's price is up by around 280% over the past 12 months, while Ethereum is up by around 950%.
In some cases, market downturns are a good opportunity to buy stocks when their prices are lower. With Dogecoin's price falling to nearly half of what it was a month ago, is now the time to buy? Here's what you need to know.
Research before you buy
With any investment, it's important to do your research and make sure you're as informed as possible before you buy.
It's easy to let your emotions get the best of you and buy simply because an investment is "on sale." This is especially true with an investment as volatile as Dogecoin.
The cryptocurrency experienced explosive growth essentially overnight, and it's easy to fall into the trap of thinking that if you don't buy right now, you may miss your opportunity. But rushing into an investment is never a good idea, and you may end up regretting your decision later.
If you're considering investing in Dogecoin, think about the cryptocurrency's fundamentals and whether it's likely to experience long-term growth.
Cryptocurrency is highly speculative, which automatically makes Dogecoin a high-risk investment. While cryptocurrency could someday become mainstream, it's just as likely that it will flop. There's no guarantee that cryptocurrency will still be around five or 10 years from now, and Dogecoin can't succeed if cryptocurrency is never widely accepted.
Even if cryptocurrency does thrive, that doesn't necessarily mean Dogecoin will succeed as well. There are countless types of cryptocurrency out there, and Dogecoin is up against some stiff competition.
How does Dogecoin stack up?
In order for any investment to succeed over the long run, it needs a competitive advantage and real-world utility. Right now, Dogecoin lacks both.
Most cryptocurrencies lack real-world utility at the moment, because this form of currency is not widely accepted among merchants.
However, even among the companies that do accept cryptocurrency as a form of payment, most accept Bitcoin over Dogecoin. While that doesn't necessarily mean that Dogecoin will never become widely accepted, it will need to work hard to catch up to Bitcoin.
Dogecoin supporters point to the fact that the cryptocurrency uses less energy than Bitcoin, which could give it an advantage. Although it's true that Bitcoin is incredibly energy intensive and that is raising concerns among investors, there are other cryptocurrencies that are more energy efficient than Dogecoin.
In addition, developers of Ethereum are working on an update to the technology. Ethereum 2.0 is expected to be released later this year or early next year, and it will use 99.95% less energy than the current network. Ethereum is already the second-most popular cryptocurrency behind Bitcoin, and its energy efficiency could give it a major advantage over Dogecoin.
Will Dogecoin continue growing?
So if Dogecoin lacks real-world utility and a competitive advantage, why is its price increasing faster than its competitors? It has to do with its popularity among online investors and celebrities.
Celebrity billionaires like Elon Musk and Mark Cuban have promoted Dogecoin on social media, and retail investors have jumped on the bandwagon and sent Dogecoin's price to the moon. That type of short-term growth is likely unsustainable, though, and there's a good chance Dogecoin won't continue this upward trajectory for much longer.
This isn't to say that Dogecoin is doomed to fail. It has certainly surprised people in the past, and if it continues to improve and develops a real competitive advantage in the industry, it could potentially go far. Right now, though, investing in Dogecoin is more akin to gambling than investing.
Dogecoin may be on sale right now, but that doesn't necessarily make it a good investment. Before you invest anywhere, think about whether that investment has strong fundamentals and will make a solid long-term investment. Dogecoin may not fit the bill, but there are plenty of better options out there.