It's been nearly three years since Dogecoin (DOGE -3.61%) took the cryptocurrency world by storm. Despite the initial frenzy fading away, Dogecoin remains ranked among the top 10 most valuable cryptocurrencies by total market capitalization.
However, just because it still holds a spot among the top 10 doesn't mean it's worth a spot in your portfolio. In this article, we'll delve into three key reasons investors should be cautious about the original memecoin.
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1. Unlimited supply
One critical aspect to consider is Dogecoin's unlimited supply. Unlike cryptocurrencies like Bitcoin (BTC -2.17%), which have a finite supply, Dogecoin's unlimited supply presents a challenge for maintaining long-term price stability and appreciation.
Similar to other assets, the value of cryptocurrencies is heavily influenced by supply-and-demand dynamics. If the demand doesn't match the constant influx of new coins, the inevitable consequence might be a gradual decline in value. This challenge is particularly pertinent to Dogecoin, which adds nearly 5 billion new coins to circulation annually.
While other factors contribute to a cryptocurrency's value, the lack of scarcity plays a pivotal role. With an ever-growing and infinite supply, Dogecoin's price will be unable to appreciate without exponentially increasing demand.
2. Limited utility
Another concern is Dogecoin's limited utility. Unlike some cryptocurrencies with diverse use cases, such as non-fungible tokens (NFTs), decentralized applications, and more, Dogecoin's primary function is limited to just transactions.
Unfortunately, this singular purpose doesn't set it apart from the crowded field of cryptocurrencies, as every other cryptocurrency can be used for payments. Without versatile utility, Dogecoin's role in the decentralized economy becomes extremely limited.
Compared to cryptocurrencies like Ethereum (ETH -0.15%), which can be used in diverse and innovative use cases, Dogecoin's lack of functionality prevents it from attracting greater demand from investors. This is particularly problematic since Dogecoin has an unlimited supply.
3. Historical volatility
Dogecoin's price has a history of volatility and unpredictable behavior. While it experienced a meteoric rise in 2021, soaring 16,000% to reach a price of $0.74 in just under six months, this surge was primarily attributed to social media hype and speculative fervor rather than genuine utility or valuable characteristics. This six-month run is the one point in Dogecoin's history where demand surpassed supply.
Yet, since reaching that peak, Dogecoin has been on a turbulent descent, with only a few brief rallies. Driven largely by external factors, including Elon Musk's whimsical posts declaring his affection for the cryptocurrency, Dogecoin's price tends to be closely tethered to whether Musk decides to share his thoughts on any given day. With such sporadic price fluctuations, investors increasingly take on unnecessary risk.
Can't teach an old Doge new tricks
The outlook for Dogecoin remains increasingly uncertain. While the cryptocurrency has garnered attention and maintained a position in the top 10, it isn't uncommon for cryptocurrencies to rise to these levels and then fade into worthlessness.
In the already volatile world of cryptocurrencies, investors should exercise extreme caution when it comes to Dogecoin and focus on more proven, stable, and reliable options. Prioritizing exposure to assets with a proven track record and intrinsic value, such as Bitcoin or Ethereum, can provide a more secure and stable foundation for a cryptocurrency portfolio.
