Should You Buy the Dogecoin ETF?

On Sept. 18, the very first Dogecoin (CRYPTO: DOGE) exchange-traded fund (ETF), the REX-Osprey DOGE ETF, (NYSEMKT: DOJE) began trading. Its stated goal is to reflect Dogecoin's price before fees and expenses, with a 1.5% expense ratio, and crypto held with a U.S. bank custodian.

During the past 30 days, Dogecoin's price is down by 11% (as of Oct. 27), though largely as a result of the Oct. 10 crypto flash crash which had little to do with the king meme coin.

So is the new ETF worth buying? Let's take a sober look.

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What the ETF gives you

At its core, the Dogecoin ETF seeks to mirror the crypto's value, minus fees. That means whenever Dogecoin goes to the moon, crashes, or bounces around, you will get the same price performance from the ETF, accessible from whichever traditional financial system accounts you hold it in. In terms of the risks associated with an investment, you should consider the ETF to be equivalent to the underlying asset.

For what it's worth, there are other applications pending that could bring more Dogecoin ETFs to the market very soon, which reinforces the point that these products are largely interchangeable and are designed to deliver the same exposure through brokerage accounts. So when we discuss Dogecoin, understand that whichever conclusions we reach will also apply to any other spot Dogecoin ETFs that end up getting approved.

If the convenience of holding a cryptocurrency in your brokerage or retirement account is a priority, using an ETF is presently the only way to do it. On the other hand, if your goal is pure exposure to the crypto asset at the lowest ongoing cost, holding Dogecoin directly avoids a permanent fee drag, so it's preferable, assuming you don't mind running your own wallet or using a custodian.

Observant investors will notice that this discussion sidesteps the question of whether Dogecoin itself is worth buying, which is the more important issue here. Let's get into that next.

Is there a bull thesis?

If you've ever bought a suit or a dress just because it came in a fancy branded garment bag, you already understand the idea of buying Dogecoin on the basis of it being wrapped in a new ETF. Packages can be convenient and familiar, but they don't change what's inside. And in this case, the investment thesis for Dogecoin is basically nonexistent if we approach the topic seriously.

The main problem is that it doesn't have any mechanism by which the coin will be worth more tomorrow than it is today, aside from hype. The new ETF could indeed lead to some capital inflows that increase the crypto's price, and perhaps durably so. Still, it isn't used for anything, its memetic power isn't a reliable growth driver, and over the long term, holders will get their value diluted.

Dogecoin's supply is always rising, by design. Roughly 5.2 billion new coins are minted each year, and there is no supply cap. That means existing holders rely mostly on rising demand to offset constant expansion of supply, and, as mentioned, there is no way to consistently generate that demand.

Nonetheless, some point to emerging technical work on the coin as a future catalyst, and they might be right.

A community proposal being discussed right now would add a new feature that could support Layer-2 (L2) blockchains and pave the way for offering smart contract-style features. That would add a lot to the coin's potential utility, though there would still be the challenges of getting people to use the new chain, and of converting activity on the L2 into returns for holders. But as of now it is a proposal, not a completed upgrade, so any upgrades might be years out, or they might never happen.

In other words, there's nothing concrete to make Dogecoin worth buying in the near term. Therefore, buying an ETF that simply mirrors it is unlikely to improve expected outcomes for investors. Don't buy the Dogecoin ETF until there's some future to believe in regarding Dogecoin itself, and don't hold your breath for that to happen either.

Alex Carchidi has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.