The Dogecoin (DOGE -6.00%) blockchain is a ghost town compared to other cryptocurrencies in the market cap top 10. Yet the cryptocurrency continues to surge whenever the broader market moves, including a 70% jump in early August.
With a small handful of investors exerting market-moving power over the entire currency, here's why Dogecoin is not a viable long-term investment -- and why its pumps are based on little more than hot air.
Hardly anybody uses Dogecoin
The Dogecoin blockchain recorded just over 23,000 daily transactions on Aug. 9, according to the latest available data. That's a mere fraction of the 1.2 million transactions recorded on Ethereum (ETH -5.83%), and the roughly 200,000 recorded on Bitcoin (BTC -4.99%).
Even cryptocurrencies with market caps less than one third of Dogecoin's regularly record more transactions. Bitcoin Cash (BCH -6.76%) and Litecoin (LTC -5.64%) -- despite both being pushed out of the market cap top 10 in recent times -- recorded 83,000 and 133,000 transactions, respectively, on Aug. 8.
So why does Dogecoin's price continue to climb despite such a slim user base? The answer lies in its vastly unequal ownership.
Whales control the blockchain
Dogecoin has one of the most lopsided wealth distributions in the crypto space, with just one address accounting for 28% of all Dogecoins. A mere eleven addresses hold 46% of the circulating coins, while just 82 addresses account for over 64% of the total supply.
You can see the influence of these few large hands in the movement of wealth across its blockchain. Users transferred more than $5 billion worth of coins via Dogecoin on Aug. 8, compared to just over $8 billion on Ethereum. But as noted earlier, Ethereum achieved this with more than 50 times as many users as Dogecoin, meaning the average Doge user is moving a much higher value of coins per transaction.
Cryptocurrency was born of a desire to eradicate intermediaries such as bankers and governments, and transfer control of one's finances to the individual. But Dogecoin fails to meet the cryptocurrency space's oft-quoted goal of decentralization, and its concentration poses serious risks for would-be investors. Its centralized supply effectively creates a small cabal of players with their own bank-making powers -- and the ability to dictate the Doge price at will.
A joke currency that's no longer funny
With supporters like Elon Musk, Dogecoin unexpectedly became the cryptocurrency space's story of the year. In the process, it gained a reputation as a people-powered underdog, as with the thousands of individual investors who banded together on social media to pump up GameStop (GME -2.83%).
But the hard data canvassed from Dogecoin's transparent blockchain suggests exactly the opposite. Dogecoin was created as a joke in 2013 -- and by the standards of its own creators, it remains so today. Dogecoin co-creator Billy Markus sold all of his Doge holdings in 2015 to buy a Honda Civic. Fellow co-creator Jackson Palmer, has also since dismissed Dogecoin, while characterizing the entire cryptocurrency space as representing "the worst parts of today's capitalist system."
Dogecoin's heavily concentrated supply presents a clear danger to the average investor, who may confuse Dogecoin's popularity with legitimacy. Cavalier Dogecoin investors might want to look back at the two-month period between May and July when the coin's price sank by 78% -- one of the largest drops in the crypto space at the time.
While this price-drop followed the direction of the wider market at the time, Dogecoin suffered all the more because of its extravagances in the preceding months, when it pumped to the tune of 12,000%. What goes up must come down, and Dogecoin investors learned the hard way that celebrity endorsements (even from the likes of Elon Musk) do not constitute solid investing fundamentals.
Almost eight years on from its invention, the coin still has relatively few applications -- though it's a popular currency on Bitpay, where users can spend Doge and other currencies with a debit card. With uncertain long-term prospects and no larger use case beyond payments, Dogecoin continues to rise and fall based on the actions of a few wealthy individuals. When those individuals decide it's time to sell, the average investor is likely to be left nursing heavy losses. For this reason, Dogecoin should be viewed as a very risky, speculative vehicle, and not a viable long-term investment.
Editor's note: The previous version of this article contained factual inaccuracies. We've updated it to reflect that Dogecoin remains in active development, and to add information about some of Dogecoin's applications. The Fool regrets the error.