You probably don't need me to tell you this, but 2022 was a challenging year for crypto investors. Ironically, cryptocurrency Dogecoin (DOGE -3.58%) has remained one of the market's most lucrative investments over the past three years. Had you bought $10,000 of it three years ago, it would be worth an eye-watering $327,000 today!
That is pretty remarkable, considering Dogecoin declined by 60% in 2022. So, should investors load up for the next crypto bull market? I'll walk through what ultimately drives token prices, how recent events have affected the landscape across cryptocurrencies, and why investors should temper their expectations.
What sent Dogecoin to the moon
Despite being a meme coin created as satire, Dogecoin exploded in value over the past few years. In the space of just a few years the cryptocurrency minted millionaires. And as the chart below shows, it remains well above pre-2021 prices, even if it's nowhere near its former highs. So what caused it? Supply and demand drive the prices of cryptocurrencies, and the coin became a viral sensation when markets were highly bullish in 2021. Investors flocked to it, especially once Elon Musk publicly praised the token, something he's still doing today. Investors had a sense of FOMO, or fear of missing out.
Dogecoin Price data by YCharts
Unfortunately, Dogecoin's price didn't hold up; a bear market in stocks and cryptocurrencies has settled in over the past 18 months. Wary investors have been much less willing to risk money on more speculative assets like Dogecoin. But can Dogecoin return to its highs when the market eventually turns positive again? It's not so simple.
Dogecoin's losing battle against supply and demand
At the risk of sounding like a broken record, I will emphasize again that cryptocurrency prices come from supply and demand. In their simplest form, prices go up when people want something and down when they don't. Looking at Dogecoin through this lens raises some concerns.
Dogecoin doesn't have a capped supply like some other cryptos. For example, Bitcoin's supply is limited at 21 million; there will never be more. It's much easier to justify paying more for something if you know it's scarce. But Dogecoin has an infinite supply; about 5 billion of the coins are added each year, meaning there is about 10 billion more Dogecoin in circulation now than when it hit its former high. That has put downward pressure on the token's price, regardless of what demand does.
The landscape has changed
The broader landscape around cryptocurrencies has changed a lot in the past two years. Some crypto exchanges such as BlockFi and FTX have collapsed and gone bankrupt, leaving investors penniless and searching for answers. So not only must investors' risk appetite return, but trust in the cryptocurrency ecosystem might also need time to recover. Until then, it seems hard to imagine another frenzied market as we saw in 2021.
The gains investors had in Dogecoin were like lightning in a bottle, and replicating that could be difficult. Dogecoin is a fundamentally flawed token due to its ever-increasing supply, and the conditions aren't ripe for the type of demand needed to overcome that and drive prices higher. Investors should approach the coin like its founders did -- with a smile and an unserious attitude, and refrain from making it an important part of your portfolio.
