Dogecoin (CCC:DOGE-USD) is down this week with other cryptocurrencies like Bitcoin (CCC:BTC-USD) and Ethereum (CCC:ETC-USD). This highlights its inherent weakness. It will likely still be an “alt” or alternative cryptocurrency after the two major cryptos, Bitcoin and Ethereum.
As such, it is likely to have a much wilder ride and higher volatility than these other two cryptos. One of the reasons for this is that Dogecoin is currently ranked the 14th largest crypto in terms of market cap.
Market capitalization and volatility
For example, Coinmarketcap.com reports that Dogecoin had a market cap of $ 5.784 billion as of February 23. This compares to $ 873.7 billion for Bitcoin and $ 172.3 billion for Ethereum.
The market capitalization of a cryptocurrency is the total number of coins mined and available (not necessarily in circulation) multiplied by the most recent price. In other words, Dogecoin is 0.66% of the size of Bitcoin and 3.36% of the size of Ethereum.
However, Dogecoin’s higher volatility is also due to its higher trading volume. For example, Coinmarketcap shows that on February 23, Bitcoin’s trading volume was 11.6% of its total market cap. Ethereum’s trading volume is higher at 28.8%, but Dogecoin has a whopping 40.4% of its total market cap traded for a day.
If nearly half of a security’s market value is trading for a day, its price will be much more volatile. It will also have a wider range than otherwise.
I previously pointed out that Dogecoin has an inflationary controlled supply. It releases 5 billion Dogecoins every year through mining. It can go on forever.
In contrast, Bitcoin has a deflationary supply structure. There are only 21 million Bitcoins that can be mined. Right now, according to Coinmarketcap, for example, 18.36 million of them have already been mined and someone owns all of them.
This means that less than 2.64 million Bitcoins can be mined or earned as a reward for mining. This represents only 12.57% of its total supply. This tends to subject the cryptocurrency to hoarding. This will ensure that the price will tend to increase over time. But it also means that the hoarding effect will limit the use of crypto as a currency for blockchain transactions.
In contrast, Ethereum has no limits on its supply or the number of coins that can be mined over time. This will allow it to be used more as a cryptocurrency for transactions. But it will also, over time, have a limited effect on its ability to be hoarded.
Dogecoin can be found somewhere in the middle of these. As you can see in the graph to the right (also in my previous post), the supply will decrease over time.
Over the next decade, supply growth slows to between 2% and 3%. This means that the supply inflation rate will decline slowly and predictably.
This gives Dogecoin the opportunity to be used as a cryptocurrency as its supply increases. Yet it can still be hoarded since the rate of supply growth slows over time.
What to do with Dogecoin
The savvy cryptocurrency investor will likely want to diversify their holdings to include more than Bitcoin and Ethereum. Dogecoin is a great choice as an alternative cryptocurrency.
On the one hand, its higher volatility implies that on the upside, it could potentially have a lot more scope for potential profitable gains than Bitcoin or Ethereum. Of course, this also works on the downside.
Additionally, it appears to offer the best of both worlds, in terms of usability in blockchain transactions and also its ability to enable hoarding effects.
However, a huge downside to Dogecoin has been pointed out by the the Wall Street newspaper. On February 17, they reported that one person owned up to 28% of the total supply of Dogecoins. The person’s name is not known, but at the time, the stake was worth $ 2.1 billion (probably 15% or less now).
The WSJ has also said it could be from an exchange or from a group of people. The article insists that the account holder may be Elon Musk. He has promoted Dogecoin at times, but seems to have recently encouraged people to sell it. This is all very strange.
Therefore, most people who are considering investing in Dogecoin will do so only as a diversified position among other cryptocurrencies.
As of the publication date, Mark R. Hake holds a long position in Ethereum and Bitcoin.
Mark Hake writes about personal finance on mrhake.medium.com and run the Total Return Value Guide that you can see again here.