The value of one Dogecoin (DOGE 1.22%) has risen more than 4,200% over the past five years, making the cryptocurrency especially enticing to investors willing to take on massive risks in search of huge gains.
However, those significant gains conceal some of the substantial downsides for Dogecoin and the long-term risks associated with investing in such a volatile cryptocurrency. Here's why I wouldn't touch Dogecoin with a 10-foot pole.
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1. Meme coins aren't true investments
Dogecoin is a meme coin, which means it doesn't have any real-world utility and its value fluctuates based solely on investor sentiment. You could argue that stocks move on sentiment, and that's true sometimes, but companies have revenue, profits, services, and products that investors can use to judge a company.
Dogecoin has none of those things. It's a purely speculative investment that fluctuates based on what people say it's worth, and it has no underlying utility or a unique blockchain that's being used to develop new technologies.
As investors have become uneasy about the economy -- with increasing news of layoffs and the lack of interest rate cuts by the Federal Reserve -- Dogecoin's value has plummeted 53% year to date.
2. There's a potentially unlimited supply of Dogecoin
One of the investment cases for other cryptocurrencies, including Bitcoin (BTC +0.58%), is that they have a limited supply. The predetermined shortage thus helps fuel demand for investors to snatch them up before they're all mined.
Currently, there are 20 million Bitcoins in circulation, and the total supply is capped at 21 million. In contrast, there are approximately 152 billion Dogecoins, with 5 billion added every year.
The very idea that there's no end to the amount of Dogecoin that can be mined and that billions of them are added every year, is a recipe for an investing disaster. Think of it this way: when a publicly traded company issues more shares, its price usually goes down because it typically means that the company has diluted its shares. With unlimited supply and no real utility, there's nothing intrinsically valuable about a Dogecoin.
CRYPTO: DOGE
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3. There are legitimate cryptos to buy
If you're interested in cryptocurrencies, you can still benefit from them by buying one or two that have real-world benefits. Bitcoin is generally recognized as a store of value worldwide. Its first-mover advantage in the crypto space has also made it an established coin, and the launch of Bitcoin exchange-traded funds (ETFs) last year has given it even more legitimacy.
Similarly, Ethereum (ETH +0.05%) could be a good option, considering its blockchain is widely used as the foundation for advanced financial transactions. Ethereum ETFs have also provided investors with an easy way to own a piece of the cryptocurrency, just like Bitcoin ETFs.
It's worth mentioning that no cryptocurrency is without its risks. Bitcoin's value has decreased by 6% and Ethereum's has fallen by 19% over the past year. But these leading cryptocurrencies have at least some parameters that help make them a compelling asset to own. Dogecoin, on the other hand, has no inherent value, no practical function, and its price will always be based on the day-to-day whims of investors.
