The Dogecoin bubble may not be as irrational as it looks

As a meme, Dogecoin has a real advantage over other investments. The fact that it is a joke means it is good at growing its community and making it more cohesive. Jokes have profound social benefits for in-groups; they strengthen the identity of the group itself and the individuals within it, even if they are offensive (as long as they’re told by members of that group).

To buy Dogecoin is to make a self-deprecating joke about one’s own ability to invest, but it also buys access to an in-group, a common ground on which to repeat the same fun idea. Dogecoin’s status as a useless prank supplies the confidence and cohesion that Monod said are essential to the success of a spreading, self-replicating idea.

And the more a memetic currency spreads, the more ambitious its exponents become. In July 2020, an influencer called James Galante posted a video on Tiktok urging people to “get rich” by buying Dogecoin, which was then “practically worthless”, and promoting the idea to everyone else in the social network’s claimed community of 689 million users. A rise in the price of Dogecoin to $US1 would, Galante estimated, turn an investment of $US25 made at that time into more than $US10,000. Half a century after Monod wrote that ambition is the other characteristic needed for success in the “selection of ideas”, the idea that Dogecoin can make you rich has been repeated to Tiktok users almost 400 million times.

Even the fact Dogecoin is a con may be in its favour. The South Sea Bubble in 1720, Railway Mania in 1847, and the dotcom boom in the early 2000s all collapsed because the real business activities that were being speculated on were oversold. But many of Dogecoin’s investors appear to be well aware it is not going to become a medium of exchange or a long-term store of value. They know the emperor has no clothes and they still want a selfie with him.

If Dogecoin does threaten other markets, then, it’s not the amount of money invested in it but the shift it represents in broader investing behaviour. At the turn of the millennium, the US economist Robert Shiller highlighted the influence of the internet, increases in gambling, greater trading volumes and other cultural factors as part of an environment of “irrational exuberance” that presaged a bursting of the speculative bubble.

The question today is not whether the crash will happen – it happened in 2020, and the trillions spent on QE have only helped fuel today’s speculative mania – but whether governments, companies and investors can continue to spend their way out of it.

New Statesman

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