Dogecoin’s red-hot rally over the last few days has shocked traditional investors and has been driven on by social media hype and celebrity endorsements.
Many investors are comparing dogecoin’s meteoric rise to the GameStop saga that gripped the financial world in January.
Then, the unloved shares of a brick-and-mortar video game retailer surged when day traders organizing themselves on Reddit got behind it, to the dismay of hedge funds who had been betting against the stock.
The key question for dogecoin buyers is will the meme cryptocurrency crash back down to earth like GameStop did in February.
Dogecoin was down 8.9% to $0.60259 in the 24 hours to 6 a.m. ET on Thursday, according to CoinGecko, but is still nonetheless up around 13,000% year-to-date.
A ‘flash mob’ has zeroed in on dogecoin
“The rise of low-fee electronic trading platforms has enabled flash mob retail investors to quickly move capital between assets, causing spikes in volatility that markets traditionally have not seen before.
“It’s not hard to see the similarities in investor behaviours behind the meme-stock saga and dogecoin’s recent surge,” said Mark Higgins, co-founder of risk management technology company Beacon Platform.
Dogecoin is a challenge to traditional finance
“The average Joes have banded together and rallied in their distaste towards those they believe represent Wall Street and the type of investments that historically have made Wall Street types money. They’ve been determined to demonstrate that, without formal education and credentials, they cannot just join Wall Street at their own game, but in fact beat them and obtain percentage returns completely out of the ordinary.
“They’ve done it by picking vehicles – GameStop and dogecoin – that educated financial analysts laugh at. Which of course makes it even more enjoyable and better forum-fodder than if they made money on the likes of a typical FAANG stock like Microsoft,” said Danielle Shay, director of options for educational stock market platform Simpler Trading.
Buzz and celebrity are driving up the meme token
“At this point, a lot of media and social media hype is driving dogecoin’s popularity. In that market, that’s really all you need to stand out and become the next it-coin.
“Once these phenomena gain social-media momentum, they take on a life of their own and the sky’s the limit. In the intermediate term, it does not matter what the coin is actually designed for – all that matters is that it’s buzzy,” said Eric Berman, senior legal editor for US finance at Thomson Reuters Practical Law.
“There is… a FOMO factor at play here, with speculation rife that the appearance of one of dogecoin’s biggest fans, Elon Musk, on prime time TV on Saturday, could lead to further gains in the currency.
“The fear of missing out on a future rally appears to intensify the herd behaviour, rather than any fundamental belief in the use case of the coin,” said Susannah Streeter, senior investment analyst at Hargreaves Lansdown.
Investors should be aware of heightened risks
“2021 so far has taught us an important lesson that can be applied readily to how we approach cryptocurrencies from a risk management perspective.
“In a world where a group of people on Reddit can take a self-directed trading app like Robinhood and turn markets on their heads for weeks, predicting what happens next isn’t always going to be as important as reacting to what does happen quickly,” Beacon Platform’s Higgins said.
“The ease of access to trading accounts, chatter on social media and piles of savings built up during the pandemic, seems to be fuelling the volatility.
“Investors who don’t have cash to burn would be wise to heed the warnings from the UK’s Financial Conduct Authority that if people dabble in products they don’t fully understand, they risk losing all their money,“ Streeter said.
One way dogecoin is not like GameStop
“Dogecoin is backed by nothing. It was started as a joke based on the Doge Shibu meme… GameStop is a real company with physical and digital assets. It has been profitable in the past, despite its current brick-and-mortar troubles.
“While it is a meme stock, much of the volatility in GameStop began after Ryan Cohen, the founder of Chewy.com, announced a large stake in the firm to transition it into an ‘omnichannel’ gaming company. Investors and traders have been hoping this transformation will lead to higher stock prices,” said Thomas Shohfi, assistant professor, Lally School of Management, Rensselaer Polytechnic Institute.