Dogecoin (DOGE -5.05%), created in 2013 as a parody of Bitcoin, is named after a popular meme featuring a Shiba Inu dog. Many investors initially dismissed it as a joke, but this little token generated some massive gains over the following 12 years.
Dogecoin started trading at just $0.00026, but it skyrocketed to a record high of $0.7376 on May 8, 2021. Its rally was driven by big endorsements from Elon Musk, Mark Cuban, Snoop Dogg, and other high-profile celebrities -- and amplified by the buying frenzy in meme stocks, cryptocurrencies, and other speculative investments in 2020 and 2021.
Image source: Getty Images. The Dogecoin mascot.
Today, Dogecoin trades at about $0.16. Therefore, a $100 investment would have briefly grown to $283,692 before shrinking to about $61,538.
However, its gain of more than 61,400% is still impressive. And some bullish investors expect its price to soar to $1 in the near future. So should you buy Dogecoin today?
How does Dogecoin work?
Dogecoin was created from the open-source code for Litecoin, another token that was forked (split) from Bitcoin's blockchain in 2011. Like Bitcoin, Dogecoin and Litecoin are both mined with the energy-intensive proof of work (PoW) consensus mechanism.
Dogecoin differentiates itself from Bitcoin and Litecoin with Scrypt, a proprietary hashing algorithm that processes transactions faster and requires less mining power.
Dogecoin can also be "merge-mined" with Litecoin, which means its miners can simultaneously mine for both tokens with the same computational work. Therefore, when a miner solves a PoW problem on Litecoin's primary blockchain, that same hash solution is submitted to Dogecoin's auxiliary blockchain -- and the miner earns rewards on both coins. That's a convenient way to kill two birds with one stone, but both coins can still be mined independently.
Unlike Bitcoin, which is deflationary with a maximum supply of 21 million tokens, Dogecoin is an inflationary token without a fixed supply limit. Nearly 150 billion Dogecoins are in circulation today, and that supply is climbing by roughly 5 billion tokens annually.
Dogecoin's creators designed it to incentivize payments instead of hoarding, which is also a drawback since it can't be valued by its scarcity, unlike Bitcoin. And as a PoW blockchain, Dogecoin can't natively support smart contracts -- which are used to develop decentralized apps (dApps), non-fungible tokens (NFTs), and other crypto assets -- like a proof-of-stake (PoS) blockchain. So, unlike PoS tokens, it can't be valued by its usefulness for developers.
What catalysts could drive Dogecoin above $1?
Those limitations make Dogecoin a difficult cryptocurrency to value. The biggest near-term driver for its price is probably Elon Musk, who owns Dogecoin and often tweets about it on X. Musk's creation of the Department of Government Efficiency (DOGE) under the Trump Administration, which was likely named after Dogecoin, drove its price higher.
Even though Musk recently left DOGE, he still holds Dogecoin and could keep driving its near-term price swings with his unpredictable tweets. He also had Tesla accept Dogecoin payments for certain products (but not its electric vehicles). More businesses could follow that lead if Dogecoin's price rises and stabilizes.
The token could also get a big boost if the recent filings for spot-price ETFs and other financial products from Grayscale Investments, Bitwise Asset Management, and 21Shares are approved. Those approvals, which would follow the spot-price ETF approvals for Bitcoin and Ethereum, could draw in more retail and institutional investors.
Meanwhile, several "whales" -- or big investors who can move Dogecoin's price -- have been aggressively accumulating the token this year. Those big anonymous purchasers could drive its price higher. Lastly, declining interest rates, more-relaxed regulations, and other tailwinds for the broader crypto market could bring back more bulls.
But should you buy it while it's far below $1?
I'm not convinced Dogecoin will rally to $1 anytime soon for three simple reasons: It's inflationary, it isn't useful for developers (except for sidechains which indirectly tether Dogecoin's blockchain to smart contracts), and a 525% rally to $1 would boost its market cap from $24 billion to $150 billion.
That would be nearly half of Ethereum's current market cap of $294 billion -- yet Dogecoin arguably has fewer near-term and long-term catalysts than Ether. So while Dogecoin might be an interesting play for speculative investors, I don't think it's worth buying yet.
