Cryptocurrency is the latest phenomenon in the investing world, even with the beating it has taken over the past few weeks. Many cryptocurrencies have seen their prices plummet, and Dogecoin (CRYPTO:DOGE) is no exception.
The price of Dogecoin is down more than 40% since its peak in mid-May. However, it’s still up by more than 12,600% over the past 12 months, making it one of the fastest-growing cryptocurrencies. By comparison, Bitcoin (CRYPTO:BTC) is up around 250% over the past year, and Ether (CRYPTO:ETH) has increased by close to 1,000% in the same time frame.
Because Dogecoin has experienced such explosive growth, it might seem like a smart investment. If the cryptocurrency continues surging at this rate, you could stand to make a lot of money by investing now.
Dogecoin isn’t the right investment for everyone, though, and it can be downright dangerous. So before you buy, make sure you’ve answered these three important questions.
1. Are you investing for the right reasons?
Getting rich in the stock market is certainly possible, but it’s not easy. If you’re investing solely for the purpose of trying to become a millionaire overnight, you’ll likely end up disappointed (and potentially broke).
No matter where you choose to invest, you should only be buying investments that you believe will succeed over the long term.
Dogecoin has grown significantly over the short term, but that growth may or may not be sustainable. If you choose to invest, it should be because you believe in its potential and think it will be around for the long haul — not because you’re hoping to make a quick buck.
Whether Dogecoin has any staying power is uncertain right now. Its fundamentals might not be as strong as those of larger cryptocurrencies like Bitcoin and Ether, but its supporters still believe it can continue growing. Before you invest in Dogecoin, make sure you’re willing to hold on to it for the long term.
2. Can you afford to lose your investment?
All investments are subject to some degree of volatility, but cryptocurrency is especially turbulent. And of all the cryptocurrencies, Dogecoin is one of the riskier options. This means that if you choose to buy, don’t invest any money you can’t afford to lose.
Right now, Dogecoin lacks real-world utility. The vast majority of merchants don’t accept it as a form of payment, and without widespread adoption, it will be challenging for it to become a mainstream form of currency. In addition, there are other cryptocurrencies that have lower transaction fees and use less energy, meaning that Dogecoin doesn’t have much of a competitive advantage in the industry.
In addition, its skyrocketing price has more to do with online investors pumping up its price than its fundamentals. Dogecoin has been going down a route similar to companies like GameStop and AMC Entertainment Holdings, where short-term investors inflate the stock price only to sell soon after and make a profit.
For those reasons, Dogecoin is a high-risk option. That doesn’t mean it’s impossible to make money with it, but be sure you’re prepared to potentially lose whatever you invest.
3. Have you considered all your options?
Dogecoin is one of the most well-known cryptocurrencies, but it’s not your only choice. If you only invest in Dogecoin because it’s trendy, you could end up missing out on a better alternative.
There are countless types of cryptocurrency, but two of the biggest names in the industry are Bitcoin and Ether. Bitcoin is the most popular cryptocurrency, and it’s also the one most widely accepted by merchants. Because it has the longest track record and the most name recognition, if any cryptocurrency were to succeed over the long term, it could be Bitcoin.
Ether is the second-most-popular cryptocurrency. The terms “Ether” and “Ethereum” are often used interchangeably, but technically speaking, Ether is the cryptocurrency itself while Ethereum is the blockchain technology behind it. Ethereum is one of the biggest names in blockchain, and it has a variety of uses outside of cryptocurrency. This gives Ether an advantage, because it has a better chance of succeeding if Ethereum succeeds.
Dogecoin could become a real competitor in the cryptocurrency space if it continues to improve and gain supporters. But before you invest, it’s important to do your research and make sure it’s the best option for you.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.