Dogecoin: what is it and does it have any value?

From Bitcoin to Ethereum and Litecoin to Tether, there are now over 4,000 cryptocurrencies in circulation. Dogecoin, a so-called meme cryptocurrency, began as a joke but it is now mined at a rate of 10,000 new coins every minute.

Dogecoin is one of a number of cryptocurrencies that have hit the headlines in recent months, gaining a lot of attention because of both its price rises and its uniqueness as a ‘meme cryptocurrency’ with a cult following. It has a market capitalisation of around $44 billion, making it the sixth largest cryptocurrency and the 475^th largest asset in the world (as of 10 June 2021).

The price of Dogecoin has appreciated dramatically since May 2020 (see Figure 1), but it remains a relatively cheap coin with a very large supply. But what exactly is it – and does it have any value?

Figure 1: Price of Dogecoin

Source: CoinMarketCap

What is Dogecoin?

Dogecoin is a cryptocurrency that began as a joke, taking its name and logo from a meme of a Shiba Inu dog that became popular online in 2013. It was founded by Jackson Palmer – a software engineer working for Adobe – although he has since walked away from the project.

Palmer had two tabs open side-by-side on his computer – one was CoinMarketCap (an aggregator of data on cryptocurrencies) and the other was a news article about the best meme of 2013, Doge. When switching between the tabs, Palmer had the idea to put the two elements together and quickly tweeted about a hot new cryptocurrency called Dogecoin and bought the website domain.

Shortly afterwards, IBM developer Billy Markus reached out to Palmer via Twitter asking him if he would be willing to create an actual Dogecoin cryptocurrency and it was officially launched on 6 December 2013. On 25 December 2013, multiple Dogecoin wallets were hacked but the Dogecoin community came together and refunded affected users. This marked the first of many large-scale initiatives by the Dogecoin community.

Dogecoin is primarily used for tipping users on Reddit and Twitter, but it is also accepted as a method of payment by a few dozen merchants. It can be used to buy food, household supplies and even website domains. But it was primarily created as an attempt to break the stigma surrounding cryptocurrencies, which carried negative connotations at the time. Palmer also introduced it as an alternative to the greed he saw in the cryptocurrency community and as such, Dogecoin is designed to be unattractive to investors by keeping a permanently low value due to its mining algorithm.

How does it work?

Dogecoin is a version of Luckycoin (now defunct), which itself is a ‘fork’ of Litecoin (which is also a fork of Bitcoin). A fork happens when a blockchain diverges into two potential paths and can lead to a complete change in protocol and eventually a completely new cryptocurrency. For example, in 2017, Bitcoin Cash was created after a hard fork in the Bitcoin blockchain.

The Dogecoin blockchain can process around 30 transactions per second, which is much higher than Bitcoin. It uses a proof of work consensus algorithm called Auxiliary Proof of Work, which allows those who mine other proof of work cryptocurrencies (primarily Litecoin) simultaneously to mine DOGE at no additional cost. This process is known as merged mining.

Dogecoin’s initial block rewards were designed to be random and vary between zero and one million DOGE and this continued until it reached a supply of 100 billion, which occurred in February 2018. Since then, each mined block yields a reward of 10,000 DOGE.

One block is mined every minute and Dogecoin has no supply cap. Palmer has stated that this was a mistake, and that the supply cap should have been set at 100 billion. It was left ‘unfixed’ on purpose as it keeps the cost of DOGE low.

Like Litecoin, Dogecoin uses Scrypt technology, which has lower hashrates (a measure of computational power per second) and uses less energy than Bitcoin’s SHA-256 mining algorithm. Overall, Dogecoin is quite different from Bitcoin, which has a supply cap of 21 million coins, of which over 18.5 million have already been mined.

Community and backers

The Dogecoin Foundation is a non-profit corporation registered in the US state of Colorado, and was created to facilitate the philanthropic initiatives of the community. Back in 2014, the foundation sponsored the Jamaican bobsled team so they could compete at the Sochi Winter Olympics and then sponsored NASCAR driver Josh Wise who sported the icon on his car and jacket at the 2014 Talladega All-Star race. They also sponsored Doge4Water, a project that successfully funded the creation of a clean water well in Kenya.

Source: Reddit

Reddit threads proclaim Dogecoin’s value as a new global currency and Tesla chief executive Elon Musk commented that ‘Dogecoin was made as a joke to make fun of cryptocurrencies, but fate loves irony. The most ironic outcome would be that Dogecoin becomes the currency of Earth in the future.’ Musk regularly tweets about cryptocurrencies and his recent tweet criticising the energy usage of Bitcoin corresponded to a 30% fall in its value.

But he remains more positive about Dogecoin, with his tweet stating that he is working with its developers to improve the network causing a surge in price – as did his tweet asking followers whether they want Tesla to accept Dogecoin.

Dogecoin thus has strong backing and the recent rise in the prices of meme currencies and shares such as GameStop shows that large groups of small investors can move markets.

Does Dogecoin have any value?

Like all cryptocurrencies, Doge has no fundamental value, and some argue it has no reason to have any. Jeffrey Halley, a senior market analyst at Oanda Asia Pacific Pte., a platform for trading traditional currencies, is quoted as saying: ‘Dogecoin has no apparent commercial or investment use other than as a conduit for speculative mania and the attempt to make a buck. I suspect much of its appeal lies in the fact that it is very, very cheap to buy and sell, as opposed to $60,000 for Bitcoin, making it much more approachable to a retail trader who fancies a flutter.’

The low nominal price may have a psychological effect on investors like ‘penny stocks’ do, but whether you put $1,000 in Dogecoin or Bitcoin, you are risking the same amount. Curtis Ting, managing director for Europe at crypto exchange Kraken, suggests that investors buy Dogecoin for the memes as much as for the money, stating: ‘investors buy Dogecoin to participate in a self-deprecating joke about their inability to invest wisely, which keeps going as the price of an individual Dogecoin continues to appreciate.’

The huge fluctuations in price look a lot like a ‘pump and dump’ scheme, where users jack up the price by focusing attention on a cheap asset, encouraging investors to buy and then dumping the coin and leaving behind the investors who are too slow or not savvy enough. Further, the ownerships of Dogecoin seems to be concentrated in relatively few anonymous hands, so it may not take much to get the price moving in either direction.

The future

What the future holds for Dogecoin, never mind other cryptocurrencies, is a guessing game. The big problem with the cryptocurrency space is the polarisation of opinion – commentators, bloggers and YouTubers are either crypto haters or ‘moonboys’ (believing that Bitcoin and other cryptocurrencies will go to the moon).

But the uptick in attention is part of a wider phenomenon of investors piling into speculative assets. Société Générale SA’s global head of quantitative strategy, Andrew Lapthorne, has cited Dogecoin as an example of ‘an increasingly large number of weird and wonderful signs of market excess.’ Indeed, over 50 meme cryptocurrencies are now listed on CoinMarketCap, documenting their rise to prominence.

Like all cryptocurrencies, the greatest inhibitor to its growth is the inability to use it for transactions. Yet the specific issue for meme cryptocurrencies, as opposed to other cryptocurrencies, is that their usage relies somewhat on users being attracted to the meme. If investors lose interest in the meme, then the price will collapse and Dogecoin will be worthless.

Only one thing is for certain: Dogecoin is one of the most speculative and volatile cryptocurrencies today.