Dogecoin Up Almost 40% on Elon Musk's Tesla Merch Announcement

Dogecoin jumped on Tesla news, but can it hold its gains?

Dogecoin (DOGE) jumped today after a lackluster few months following news that Tesla will accept the coin for merch payments. Tesla merchandise includes clothing, mugs, belt buckles, and mini models of its cars.

Tesla CEO and longtime Dogecoin enthusiast Elon Musk tweeted: "Tesla will make some merch buyable with Doge & see how it goes."

Dogecoin's lackluster performance

Dogecoin has slipped down the list of top 10 cryptos by market cap in recent months. It briefly took fourth place in May when it reached its all-time high, but has struggled to gain much momentum in the second half of the year.

Today's price rise put it briefly back into ninth place, though with a market cap of around $24 billion, it quickly fell into 10th position again. The price rose 38% from $0.1576 yesterday to a peak of $0.2175 earlier today.

Elon Musk's Dogecoin drama

Elon Musk, who was recently named Time magazine's Person of the Year for 2021, is no stranger to pushing DOGE's price up on social media. The self-proclaimed Dogefather often tweets about his pet coin. He has said that fate loves irony, and the most ironic outcome would be if Dogecoin became the currency of the earth.

Indeed, Musk also told Time magazine that he thinks Dogecoin is better for digital transactions than Bitcoin (BTC). He's probably right, but it's not the best comparison. Bitcoin is the granddaddy of cryptocurrencies, but it is also old and technology has evolved a lot in the past decade. Almost every other cryptocurrency on the market is faster and cheaper than Bitcoin.

Given that Tesla stopped taking Bitcoin payments in May due to environmental concerns, the move to accept DOGE is at best odd. Dogecoin uses the same environmentally-damaging proof-of-work mining model as Bitcoin. There are a number of eco-friendly crypto tokens that use other models, such as proof-of-stake, to validate their networks. And the second-biggest currency, Ethereum (ETH), hopes to move to proof-of-stake next year.

Could this spur Dogecoin to new highs?

Dogecoin's success this year has caused some analysts to reevaluate their position on meme coins. Dogecoin was launched as a joke in 2015 to poke fun at the way people bought into cryptocurrencies they didn't understand. But its loyal community and support from Musk have pushed it into the top 10 coins by market cap.

From an investor standpoint, the concern is that Dogecoin has captured people's hearts, but it still doesn't have a lot of functionality. Unlike, say, Ethereum or Solana (SOL), which are ecosystems for a host of other applications, Dogecoin was actively designed with no purpose.

It has found some utility as a form of payment. Just under 2,000 merchants currently accept Dogecoin as a form of payment according to Cryptwerk, an online crypto directory. Over 7,500 take Bitcoin and almost 4,000 take Ethereum.

The digital payment space is complicated. Not only are there many cryptocurrencies striving for merchant acceptance, payment coins also need to compete with stablecoins and potentially govcoins or central bank digital currencies (CBDCs). Governments around the world are considering launching their own CBDCs, which would have a big impact on digital payments.

In addition, as shown by the muted price reaction to the re-formation of the Dogecoin foundation earlier in the year, people never bought the coin because it had solid fundamentals. They bought it because it was fun and accessible. And more recently, because they were speculating and hoping for further price increases.

Buying Dogecoin is still risky

If you're considering buying Dogecoin today, the biggest question is how you believe the coin might perform in the long term. Sure, the coin has gained over 3,000% so far this year. And it will probably jump again on future Musk mentions.

But bear in mind that if you'd bought at its May peak of $0.7376, you'd now be down almost 80%. Or to put it another way, if you'd bought $500 of DOGE on May 8, it would be worth just over $100 today.

All cryptocurrencies are risky investments, but coins that don't have solid fundamentals are even riskier. And while Dogecoin is listed on most top cryptocurrency exchanges and has almost become a household name, it's still a high-risk proposition. Put simply, the token needs more than Musk's tweets if it's to succeed.

Today's announcement is certainly good news for Dogecoin investors. But can it hold onto the price increase and go further? Based on its performance in the past six months, that looks unlikely.

Emma Newbery owns Bitcoin, Ethereum, and Solana. The Motley Fool owns shares of and recommends Bitcoin.