The Honest Truth About Investing in Dogecoin

The digital asset market is extremely volatile. Dogecoin (CRYPTO: DOGE) is the perfect example of this. As of April 15, this cryptocurrency is trading 86% below its record high from May 2021.

You might be interested in buying this meme token with the hope that it can turn things around, and that its price can bounce back to produce strong returns. I'm critical of this plan, though. Here is the honest truth about investing in Dogecoin.

Image source: Getty Images.

Dogecoin's price moves aren't rooted in fundamentals

There are currently 17 full-time developers working on Dogecoin, according to data from Electric Capital. Meanwhile, 86 blockchain networks have a bigger active developer community. This is a clear signal that Dogecoin isn't bringing on these valuable stakeholders that can contribute code, introduce updates, or launch new use cases that improve Dogecoin's functionality. That's a discouraging trend.

If the fundamentals are weak, it forces investors to figure out what actually moves the price. This is where hype comes into the picture.

Dogecoin's historical price chart is full of short bursts of rapid price increases. This typically comes after a prominent business figure, like Elon Musk or Mark Cuban, publicly mentions the crypto. But these gains don't usually last long.

From an investing standpoint, it's wise to avoid trying to time these price swings because it can cause financial losses. Dogecoin has not shown the ability to hold on to its gains in recent years, which suggests its best days are in the past.

Competitive intensity will diminish its appeal over time

The cryptocurrency industry will be more mature in five or 10 years. And it's easy to argue that there will probably be new blockchains that pop up with unique capabilities and features that draw investor attention and capital. That's how innovation works.

Consequently, Dogecoin could continue to lose its appeal over time. While it benefits from having a strong community of supporters, even this isn't safe if there are other exciting projects that are introduced. This will pressure demand and put a lid on any potential price appreciation.

This loss of enthusiasm is already playing out. Dogecoin's token price is down 75% in the past five years.

Even today, there is a lot of competition from higher-quality digital assets. Bitcoin, at a market cap of $1.5 trillion, is what Dogecoin was inspired by. Both aim to be decentralized monetary networks, with their tokens trying to be stores of value and mediums of exchange.

But Bitcoin is way ahead of Dogecoin. It has a hard supply cap, while Dogecoin's supply expands by about 5 billion tokens each year with no limit. Bitcoin has deeper liquidity. And it's slowly entrenching itself into the traditional financial system. Dogecoin can't compete with this.

Therefore, the dog-themed crypto is best avoided.

Neil Patel 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.