Despite frenzied enthusiasm, Dogecoin (DOGE 0.55%) has yet to reach the $1 price target set by the Reddit community. It came close in early May when it peaked at over $0.70 per token, but the tide has seemingly turned, and the meme currency has lost 60% of its value since then.
That sounds bad out of context, but Dogecoin is still up over 5,000% year to date. And given those gains, crypto enthusiasts may be tempted to buy the recent dip, but I think that would be a mistake. Instead, investors should consider MercadoLibre (MELI 1.09%) -- here's why.
Doge devotees often cite the meme coin's popularity as a core tenant of their investment thesis. The argument goes something like this: As more people become aware of Dogecoin, more merchants will accept it as payment, which will cause more consumers to buy it, driving the price up in the process.
And indeed, after its incredible run this year, Dogecoin is now a recognizable name for many investors. In fact, earlier in 2021, it surpassed bitcoin to become the most tweeted about cryptocurrency of all time.
But there's a problem, and it breaks the investment thesis: Dogecoin is too volatile to be a useful currency. If the U.S. dollar lost 70% of its value in little over a month, consumers would lose all confidence in the currency and the economy as we know it would likely collapse.
However, this point is almost irrelevant since Doge investors aren't treating the token as a currency. Instead, many view it as an appreciable asset, meaning they buy Dogecoin in the hopes that it will increase in value. But that presents another problem: Dogecoin wasn't designed to build wealth.
Like most currencies, the supply of Dogecoin is not fixed -- 10,000 new tokens are minted each time a block is added to the blockchain, which happens about once every 60 seconds. That means 5.3 billion new tokens are created each year. Put another way, the supply of Dogecoin will increase by 4% over the next 12 months. And while that's not an outrageous rate of inflation, it's still inflation.
Here's the big picture: This meme currency lacks a solid investment thesis. Dogecoin's meteoric rise in value was powered by hype alone, and the problem with hype is that it eventually fades away.
MercadoLibre is the leading e-commerce marketplace in Latin America, and its fintech platform Mercado Pago is the leading digital payments service in the region. To supplement this ecosystem, the company also provides logistics, financing, advertising, and other software solutions.
In 2015, MercadoLibre integrated cryptocurrency into its platform and now supports bitcoin payments in three key geographies: Mexico, Brazil, and Argentina. Likewise, a partnership with BitPay makes it possible to fund Mercado Pago wallets with bitcoin, which effectively allows consumers to make Bitcoin-powered purchases anywhere the digital wallet is accepted.
In 2021, MercadoLibre doubled down on cryptocurrency, buying $7.8 million in bitcoin as part of its treasury strategy. And while this initial investment is small compared to the $1.8 billion in cash and short-term investments on its balance sheet, CFO Pedro Arnt said it should help MercadoLibre "[move] up the learning curve in terms of understanding crypto."
Since adding Bitcoin support in 2015, MercadoLibre has grown at a rapid pace. Of course, the increasing popularity of online shopping and digital payments have been key growth drivers, but the company's acceptance of cryptocurrency has certainly played a role.
Q1 2021 (TTM)
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Here's the big picture: By allowing consumers to use Bitcoin for marketplace payments and digital wallet top ups, MercadoLibre is well positioned to bring crypto enthusiasts to its platform. That should drive increased purchase and payment volume over time, helping the company grow its top line.
But even if bitcoin disappears completely, MercadoLibre would still have a thriving business. Its marketplace and fintech platform would still benefit from major secular trends, and both would continue to generate cash. In other words, MercadoLibre's success may be enhanced by cryptocurrency, but it doesn't depend on it. That's why this stock is a better buy than Dogecoin.