Buy the Rumor, Sell the News? Dogecoin Erases Recent Gains

Why did Dogecoin fall after Elon Musk's Twitter deal got confirmed?

What a difference a day makes. On Monday, speculation over Elon Musk's Twitter takeover drove Dogecoin (DOGE) to some of the highest prices it's seen this year. By Tuesday night, Musk's pet crypto was down around 5% in the past 30 days. So what happened?

Dogecoin's rollercoaster ride

According to CoinGecko data, at around 5 a.m. on April 25, Dogecoin's price was at $0.126, the lowest it's been all month. However, as rumors started to circulate that Musk had actually reached a deal to buy the popular social media platform, Dogecoin's price began to rise.

By 4 a.m. on April 26, DOGE had climbed to $0.165, one of its highest peaks so far this year. The meme token gained over 30% in just over 24 hours, and loyal Shibes began to hope for another extraordinary DOGE rally. Unfortunately, the opposite happened -- Dogecoin then fell around 15%.

It's been over a year since Dogecoin shot to fame. In 2021, DOGE climbed over 1,000% in just 30 days between April 7 and May 7. That type of eye-watering growth from a token that had been created as a joke and became a top 10 crypto is the type of rags to riches story people love. Even now, Dogecoin still has a loyal community of followers, even though its price is down around 80% from its all-time high. DOGE is still one of the top 20 cryptos by market capitalization and continues to dominate headlines and internet searches.

Why couldn't Dogecoin hold its gains?

One of the challenges with buying Dogecoin is that it was deliberately created with no real utility. As a result of its unexpected success and continued presence in the crypto charts, Dogecoin's non-profit has attempted to shore up its foundations and give it purpose as a form of payment.

In theory, the news that Musk is taking over Twitter could help it achieve that goal. Tesla, one of Musk's most prominent companies, already accepts DOGE payments for merchandise. And Twitter has already launched Bitcoin (BTC) tipping. So it's not such a stretch to think the popular social media platform might eventually accept some form of Dogecoin payments. Unfortunately, in practice, it looks like Dogecoin got hit by a phenomenon called "buy the rumor, sell the news."

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Here's how it works. People hear rumors of a major announcement or technical upgrade that might push an asset's price up. They buy based on that rumor, but they aren't planning to hold the asset long term. The idea is to sell at a profit when the news breaks, or just before. As a result, when the much-hyped event actually happens, those speculative traders sell their positions and the price may actually fall.

We saw one example of this in the Dogecoin rally we mentioned earlier. Speculation that Musk might mention Dogecoin on Saturday Night Live last May reached a frenzy. It pushed the price to what now looks like an unsustainable high. Many traders cashed out before or during the show. DOGE's price fell and has never recovered.

Selling the news wasn't the only factor pushing Dogecoin's price down this time. Fears of an escalation in the Russia-Ukraine conflict caused crypto prices to drop across the board. But those market jitters only account for part of Dogecoin's price drop.

What it means for investors

Like many things in investing, the idea of buying the rumor and selling the news sounds great, but isn't always easy to carry out in practice. For a start, it's hard to know which rumors are true, and which might move markets. And even then, it takes a lot of luck to time your buys and sells. A better strategy? Buy and hold cryptos that you believe will perform well in the long term.

A cryptocurrency project that's anchored by strong fundamentals is less susceptible to strong currents. The Dogecoin team is working hard to establish it as a viable form of payment, but it is not there yet. As a result, speculation has an outsized impact on its price. If Musk involves DOGE in his Twitter plans, it would be a significant step for the token. But right now, it's too early to say how this will pan out and the rumor mill is only muddying the waters.