Prediction: Dogecoin Is Going to Plunge by 50% (or More) From Here

Bitcoin (CRYPTO: BTC) launched in 2009, and it quickly attracted hordes of hardcore believers who predicted it would transform the entire financial system. In 2013, two friends named Billy Markus and Jackson Palmer felt the cryptocurrency industry was suddenly taking itself too seriously, so they launched a token called Dogecoin (CRYPTO: DOGE). It was inspired by the famous "Doge" meme, which was sweeping the internet at the time.

Markus and Palmer admitted that the whole exercise was a joke, but investors had the last laugh when Dogecoin's market capitalization soared above $90 billion in 2021, making it more valuable than most companies in the S&P 500. Unfortunately, since sheer speculation drove that incredible rise in value, an inevitable crash followed.

Dogecoin is now trading at just $0.09 per token, well below its 2021 peak of $0.73. Here's why I think it could decline by a further 50% (or more) from here.

Image source: Getty Images.

Dogecoin lacks a sustainable source of demand

When investors participate in speculative frenzies, they are relying on the "greater fool theory" to make money. In other words, no matter what price they pay for a given asset, they believe another investor will always come along and pay a higher price, no matter how flawed its fundamentals might be. When the market inevitably runs out of new buyers, the price of the asset collapses.

High-quality assets, on the other hand, have real fundamental value. A stock will always find buyers if the underlying company is producing strong revenue and earnings growth. Similarly, a piece of real estate will be in demand if it boasts a high rental yield and steady capital growth. Speculative cryptocurrencies like Dogecoin don't have a sustainable source of organic demand, so they struggle to maintain their value over time.

According to crypto directory Cryptwerk, only 2,193 businesses around the world are willing to accept Dogecoin as payment for goods and services, and most of them are obscure providers of internet and crypto services. People have no reason to buy a particular cryptocurrency if they can't spend it at their favorite stores, so this is a huge barrier to mainstream adoption for Dogecoin.

Other cryptocurrencies have found a source of ongoing demand in the investment community. Bitcoin, for example, is considered by many investors to be a legitimate store of value for three main reasons. First, it's fully decentralized, which means it can't be controlled by any person or company. Second, it has a secure and transparent system of record called the blockchain, which gives investors confidence. Third, it has a capped supply of 21 million coins, which creates the perception of scarcity.

Dogecoin shares two out of those three attributes. It's decentralized, and it has its own blockchain -- but supply is where it differs from Bitcoin in a very meaningful way.

Dogecoin's supply is set to double from here

Like Bitcoin, Dogecoin is obtained through a process called "mining." It involves using powerful computers to solve complex mathematical problems in order to validate transactions on the blockchain, which maintains the integrity of the network. A miner can be almost anybody, and they are rewarded in Dogecoin for their efforts, which incentivizes them to continue validating transactions.

Only 5 billion Dogecoin tokens can be mined each year, but there is no end date, meaning new supply will continue entering circulation until the end of time. There are 153.5 billion tokens in circulation as I write this, so assuming 5 billion more tokens are mined each year, supply will double in 31 years from now.

At the current price of $0.09 per token, Dogecoin has a market capitalization of $13.8 billion. Earlier, we established that Dogecoin lacks a sustainable source of demand, so it will struggle to create real value from here. Therefore, Dogecoin's market cap is likely to remain the same (or decline) going forward, which implies that the price of each token will halve over the next three decades as supply doubles.

So, in the year 2067, there could be 307 billion Dogecoin tokens in circulation with a price of $0.045 per token, resulting in the same $13.8 billion market cap. But the downside won't stop there -- as long as supply continues to expand, the price of a single token is likely to suffer a proportionate decline.

That isn't a very good potential outcome for investors who buy the meme token today.

Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bitcoin. The Motley Fool has a disclosure policy.