Here's Why I Wouldn't Touch Dogecoin With a 10-Foot Pole

With a trailing-10-year return of almost 40,000%, Dogecoin (CRYPTO: DOGE) makes even the best-performing stocks look like big losers. This is certainly a well-known cryptocurrency. However, the wisest investors are critical.

Here are three reasons why I wouldn't touch this meme coin with a 10-foot pole.

Image source: Getty Images.

1. Lack of utility

Unlike its dog-themed cousin, Shiba Inu, Dogecoin isn't built on top of the Ethereum network. Therefore, it doesn't have functionality for smart contracts. And it's not compatible with Ethereum's vast ecosystem of decentralized apps. This isn't to say that Shiba Inu has more utility. It just highlights that Dogecoin is really designed to be a monetary network.

But this introduces another problem: competition. Dogecoin isn't even close to Bitcoin in this battle. Bitcoin's market cap of $1.6 trillion is nearly 90 times larger than Dogecoin's. Clearly, the former has much deeper liquidity, which works against Dogecoin.

And Bitcoin is making progress as a payment mechanism. Fintech powerhouse Block just enabled its U.S.-based Square merchants to start accepting payments from customers in the form of the leading digital asset.

2. Dependent on hype

Dogecoin is extremely volatile. If you look at its price chart, it's obvious that fundamentals don't have much of an impact. There is another factor that does the heavy lifting when moving the price around.

It comes down to hype. If Dogecoin gets mentioned by prominent business figures, like Elon Musk or Mark Cuban, or if a new government initiative calls itself an acronym that shines light on the crypto, it might not be a surprise if the price moves up.

Putting your money behind something like this is a losing game. Dogecoin's price has fallen rapidly after short-term spikes. And it's impossible to correctly move in and out of the token to generate trading profits. That fact that Dogecoin is 86% off its peak (as of early February) is a sign that its best days are in the past.

3. No supply cap

Every single minute, 10,000 new Dogecoin tokens are created. On an annual basis, this figure comes out to about 5 billion. That might not seem like much, given the total supply is 169 billion. But there's no hard supply cap that's set.

This introduces a persistent headwind for the coin to overcome if it wants to see its price rise sustainably over the long term. And again, the unlimited supply structure puts Dogecoin at a disadvantage to Bitcoin, which has scarcity built into the software.

Add this to hype cycles and a lack of utility, and avoiding Dogecoin is an easy choice to make.

Neil Patel has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bitcoin, Block, and Ethereum. The Motley Fool has a disclosure policy.