For more than 100 years, the stock market has been the preferred wealth creator. It's historically generated an average annual return of around 7%, which is higher than all other asset classes.
But over the past decade, cryptocurrencies have run circles around the broader market. Although Bitcoin (BTC 1103.15%) tends to generate most of the press in the crypto space, Dogecoin (DOGE 1.09%), the so-called "people's currency," has delivered some of the loftiest returns. In just a six-month stretch between early November and early May, Dogecoin managed a return of 27,000%, which is more than the benchmark S&P 500 has returned, including dividends, over the past 56 years!
Unfortunately, the Dogecoin dream looks to be coming to an end. Since peaking at nearly $0.74 on May 8 -- the same day Tesla CEO and Dogecoin fan Elon Musk appeared on Saturday Night Live -- Dogecoin has shed three-quarters of its value. As of June 21, Dogecoin was trading for less than $0.17 per token.
Some folks might call this a healthy pullback or an incredible buying opportunity. As for me, I view this implosion as completely predictable. Here are 10 telltale reasons why Dogecoin's hype-driven pump was destined to end in an inglorious dump.
1. Only a very small fraction of businesses accept Dogecoin
To begin with the obvious, Dogecoin has extremely limited real-world use. It might be tradable on Coinbase now, but only around 1,400 mostly obscure businesses worldwide accept Dogecoin as a form of payment, according to online business directory Cryptwerk. For those folks who still think they're getting in before broad-based adoption occurs, it's taken eight years for Dogecoin just to reach roughly 1,400 businesses. For context, there are an estimated 582 million entrepreneurs globally.
2. Average daily blockchain transactions have been declining
If you need even more evidence that Dogecoin's popularity has been grossly overhyped, just take a closer look at the daily transaction count on its blockchain. After consistently averaging 35,000 to 55,000 daily transactions between July 2020 and May 2021, the trailing month has seen only 20,000 to 35,000 transactions occur daily on its blockchain. Considering that Visa is capable of handling approximately 24,000 transactions per second, Dogecoin's usage of late is laughable.
3. Its transaction fees are much higher than other popular cryptos
One of the main tenets of the Dogecoin hype was that its transaction fees were markedly lower than the Big Two, Bitcoin and Ethereum. While this is true, Dogecoin's transactions fees are also substantially higher than a number of other competing (and popular) tokens. Stellar, Nano, IOTA, Litecoin, Cardano, Ripple, Monero, Bitcoin SV, Bitcoin Cash, Ethereum Classic, DigiByte, Dash, and a long, long list of other digital currencies all sport lower transaction fees than Dogecoin. In many instances, these networks also verify and settle transactions quicker than Dogecoin, too.
4. There's no barrier to entry in the crypto space
To build on the previous point, there's a seemingly endless supply of new cryptocurrencies and blockchain projects being introduced on a regular basis. Because the barrier to entry in the digital currency space is nonexistent, Dogecoin's lack of competitive advantages makes it a sitting a duck.
5. Musk's tweets lacked teeth (and tangibility)
Elon Musk has been one heck of a driving force for Dogecoin. But with the exception of his announcement that he's working with Dogecoin's developers to improve network efficiency, absolutely none of Musk's other tweets and memes concerning the coin had any substance behind them. It's also worth pointing out that the "Dogefather" has flip-flopped on Bitcoin before, so his conviction to wholeheartedly support Dogecoin should be taken with a grain of salt.
6. China put its foot down
Another reason the Dogecoin train was headed for derailment was the crackdown on Bitcoin mining in China. Even though Bitcoin is a completely different token than Dogecoin, the thesis here is clear: China doesn't want any digital currencies competing against its central bank-backed yuan. This suggests that some governments won't be OK with digital currencies infiltrating their economy. As the second-largest country in the world by gross domestic product, China's actions have sent ripples throughout the crypto space.
7. Mining inflation constantly devalues "hodlers"
Though it pales in comparison to Dogecoin's lack of real-world utility, the persistent token inflation caused by mining causes another problem for this cryptocurrency. In a typical year, 5.2 billion Dogecoin will be created from cryptocurrency mining (i.e., validating transactions on Dogecoin's blockchain). In 2021, this'll lead to circulating supply inflation of about 4%. That may not sound like much, but it's been well over a decade since the inflation rate in the U.S. topped 4%. Suffice it to say, Dogecoin holders -- or, as they call themselves, "hodlers" -- are constantly seeing their positions eroded by dilution.
8. Dogecoin lacks decentralization
One of the core purposes of digital currencies is to ensure decentralization -- i.e., that no large entities exhibit significant control over a network. Unfortunately, Dogecoin fails this decentralization effort. According to BitInfoCharts.com, despite more than 3 million addresses owning at least $1 worth of Dogecoin, just 95 addresses control 66.01% of all outstanding tokens. If and when these Dogecoin whales sell, they can easily tank the price of the people's currency.
9. Margin is a big problem
The proliferation of leverage on cryptocurrency exchanges is yet another reason why Dogecoin was destined for disaster. Back on May 19, Bybt.com reported that a sudden drop in the price of digital currencies triggered margin calls on more than 887,000 crypto accountholders, liquidating some $9.4 billion in crypto assets to cover those debts. Though margin can pump up investors' profits, it can also magnify their losses if their timing is wrong. With brokerages allowing significant margin usage on these highly volatile assets, it was just a matter of time before margin calls crushed those gambling on Dogecoin.
10. All bubbles eventually burst
Finally, history is crystal clear that all bubbles eventually burst, without exception. No matter how excited investors are about a next-big-thing technology, the adoption of said technology in question never matches lofty expectations. While blockchain could have a bright future, businesses are reluctant to switch away from their tried-and-true payment infrastructure. Without any identifiable competitive advantages, Dogecoin was a pump-and-dump-based bubble just waiting to burst.