Elon Musk, the controversial CEO of the electric car company Tesla, is the world's richest man, boasting a net worth of $230 billion. So when he supports a particular asset, it can pay to find out why. But while Dogecoin (DOGE 0.34%) has been spectacularly rewarding for its early backers, investors should think twice before blindly following Musk's lead. Let's discuss why.
Why does Elon Musk support Dogecoin?
Elon Musk first tweeted about Dogecoin in April 2019: "Dogecoin might be my fav cryptocurrency." And his timing was perfect. If you bought $100 worth of DOGE at the time of Musk's first tweet (when it traded for $0.002552), you would have 39,185 coins worth roughly $2,500 at the current price of $0.0639. But while that's a pretty epic return, past performance is no guarantee of future performance.
Image source: Getty Images.
One problem is that Musk hasn't highlighted any fundamental reason for his Dogecoin support. Instead, the controversial CEO claims that he (presumably on a whim) started buying the asset after hearing employees discussing it on the production lines of Tesla and SpaceX.
Newer rivals like Solana or Cardano introduce innovations to blockchain technology such as a higher transaction speed (these assets can handle 50,000 and 250 transactions per second, respectively, compared to Dogecoin's 33). By comparison, Dogecoin retains a relatively simple use case as a way to store and transmit value. The Dogecoin blockchain also isn't programmable, which means it can't handle complex decentralized applications (dApps), which use self-executing smart contracts to offer services on the network.
Dogecoin has low real-world utility
Elon Musk seems aware of Dogecoin's lack of real-world utility and has used his considerable influence to try and rectify the situation. In January, he joked that he would eat a McDonald's happy meal on T.V. if the fast food giant accepted DOGE as payment (they declined). Later, he suggested Twitter's subscription service, Twitter Blue, should accept the meme asset as a form of payment -- and now that he has committed to buying the social media giant, he may make this vision a reality.
That said, Dogecoin remains a poor substitute for traditional money.
The first problem is volatility. Dogecoin's price has fallen 63% in 2022 alone. This level of price instability will make merchants less willing to accept it -- or want to get rid of it quickly if they do. Dogecoin is also a poor store of value because of its built-in inflation. The current supply of roughly 133 billion units of DOGE is programmed to increase by 5 billion per year, giving it an inflation rate of 3.7%. The inflation could put long-term pressure on Dogecoin's value if demand for the asset doesn't rise enough to compensate for its expanding supply.
Is Dogecoin's golden age over?
Dogecoin's price collapsed significantly in 2022. But to be fair, most cryptocurrencies had a hard time this year -- which may have more to do with macroeconomic challenges like inflation and interest rates than asset-specific shortcomings. That said, investors should think twice before following Elon Musk into this battered meme coin. Dogecoin relies on hype because of its weak fundamentals, and eventually, hype stops working. Those looking to bet on a crypto recovery should look for an asset that introduces innovations to blockchain technology, and Dogecoin isn't the one.
