Dogecoin (CRYPTO:DOGE) exploded in 2021, jumping over 4,000% year-to-date. But at $0.24 per coin, prices are down roughly 68% from their all-time high of $0.74 reached in May. And more downside could be on the horizon as the meme cryptocurrency grapples with poor fundamentals and a lack of real-world use cases. Let's dig deeper to find out why it might be time for investors to jump ship. 

A purely speculative asset

Cryptocurrencies generally struggle to achieve real-world usefulness because of their volatility and novelty, which often make them incompatible with existing financial infrastructure. Dogecoin faces these challenges to a much greater degree than many of its rivals. 

Stock chart flashing sell signal

Image source: Getty Images.

Founded in 2013, Dogecoin aimed to satirize the wild speculation that tends to drive cryptocurrency valuations. Like Bitcoin, it uses a proof-of-work consensus mechanism whereby transactions are validated and new coins are minted by solving puzzles in a process called mining. 

However, unlike Bitcoin, Dogecoin doesn't enjoy a first-mover's advantage or the burgeoning social trust of its larger rival, and its meme-ish reputation undermines its ability to serve as a store of value. It relies on the Greater Fool theory, which means people buy it to sell it to someone else for more in the future, without considering fundamentals. 

To make matters worse, Dogecoin isn't programmable, which means users can't build decentralized applications (dApps) on its blockchain. This characteristic puts its potential real-world utility far behind that of rivals like Ethereum or Cardano, which allow users to create everything from sports betting platforms to crypto exchanges on their networks. 

Built-in dilution 

Unlike bitcoin, which has built-in scarcity with a finite supply of 21 million coins, Dogecoin is inflationary. There are currently 132 billion units in circulation, according to data from CoinMarketCap.com. And that number will expand by 5 billion annually -- forever. This dilution makes Dogecoin unsuitable as a long-term store of value, because the more coins in circulation, the less each is worth. 

With an inflation rate of 3.8%, Dogecoin is technically outperforming the U.S. dollar, which could hit an inflation rate of 4.2% in 2021 according to the Federal Reserve (although fiat inflation is based on purchasing power, not the number of units in circulation). And Dogecoin's dilution could encourage people to spend the coins instead of hoarding them. 

But Dogecoin has a history of volatility. And this could make merchants reluctant to accept it as payment because of the uncertainty it could bring to their businesses. Those looking to replace fiat currency for shopping would probably be better served by stablecoins like Tether, which is pegged to the U.S. dollar and can hold its value much better than Dogecoin. 

Minimizing risk 

In general, cryptocurrencies tend to be risky because of their novelty and the high level of hype that goes into their valuations. But investors can minimize risk by avoiding assets with particularly weak fundamentals like Dogecoin. Despite its popularity, the coin's lack of real-world utility and built-in inflation could expose it to more downside pressure than its peers. 

 

 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.