Dogecoin Is a Gamble That Currently Doesn’t Make Sense

It’s probably just an example of Elon being Elon. Nevertheless, the never shy CEO of Tesla (NASDAQ:TSLA) tweeted that he was going to put a “literal” Dogecoin (CCC:DOGE-USD) on “the literal moon.”

Earth’s only proper natural satellite of course references the extreme enthusiasm some folks have about cryptocurrencies and other favored stocks or assets. But is this bullish sentiment getting a bit out of hand?

From one angle, I can understand why many folks are enthused about Dogecoin. While Elon Musk was probably playing an April’s Fool joke on the world, the man has been a vocal supporter of cryptocurrencies. Although I don’t always see eye-to-eye with Tesla’s chief executive, I must say that he’s changed my life. So, I’m grateful to him, even though I’m currently short TSLA.

Awful, I know. But being an ingrate in the market has taught me a valuable lesson – success in the investment market is a lot like dating. When you want someone or something so badly, it usually doesn’t turn out well. You give off bad vibes when you become desperate and it becomes “creepy AF,” as the kids like to say.

Indeed, when you let go and “don’t give AF,” that’s when good things start happening. The person you’re trying to attract suddenly gives you the time of day. Or the door that closes leads to one that opens.

Great stuff, but you might be wondering – what the heck does this have to do with Dogecoin?

In my opinion, everything. That’s because Dogecoin has jumped more sharks than The Walking Dead. I mean, the creators behind the DOGE token publicly acknowledged that it was conceived as a joke. Yet the world’s richest man and possibly the world’s highest man (i.e. Snoop Dogg) pushed their support for the cryptocurrency. It’s reeking desperation and one-sided groupthink.

Come on. At some point, this ship is going to implode.

Be Smart and Take Some Profits from Dogecoin

I’m about to spend more time analyzing Dogecoin than this asset really deserves. But I’m going to do it because I think it’s important that investors start thinking with their heads and not with their emotions – or worse yet, listening to social media influencers.

Primarily, Dogecoin will probably continue to outperform expectations and stretch incredulity so long as Bitcoin (CCC:BTC-USD) trades in the stratosphere. Therefore, DOGE traders should look to BTC prices to determine the viability of their speculative wagers.

Obviously, the question becomes, where will Bitcoin go next? At time of writing, BTC is on the cusp of breaking into $60,000. However, recent trades have been wildly choppy. I find this surprising – $60k is right there!

So I got curious: what are BTC traders observing that I don’t know about? Turns out, you can learn a lot about Bitcoin sentiment by analyzing its price relative to its bid-ask spread.

Source: Chart by Josh Enomoto

For a quick background, day traders often use the spread to make quick profits or scalps. If the spread is wider than usual, this implies a higher-than-normal ask and conversely, a lower-than-normal bid. Here, more people want to buy the target asset than sell, so the broker imposes a higher price on buyers. Contrarian traders use this dynamic as a bearish indicator.

If the spread is tighter than usual, the ask is lower and the bid is higher. Here, more sellers than buyers exist and brokers incentivize buyers with lower prices. Day traders interpret this as a bullish indicator.

Since the third quarter of 2018 on the Coinbase platform, the average spread for Bitcoin is 0.7%. But as of the time of writing, the spread has fallen to 0.21%, while the BTC price is near all-time highs.

In my view, this doesn’t make sense because if demand is this strong, the spread should be wider because brokers can earn more profits. This seems to suggest that Bitcoin is stretched and due for a correction. If so, buying Dogecoin now may not be the best decision.

Other Warning Signs to Consider

If you look at Bitcoin’s price and volume chart, you’ll notice that throughout this year, the value of BTC has risen while its volume has generally declined. That’s a contradiction that typically works its way to the downside.

Also, I’m not really buying the inflation argument. First, precious metals have not been performing well. Second, metrics such as money velocity and the personal saving rate indicate that fiscal stimulus is failing because people are not spending money – they’re actually saving it.

Finally, the ADP jobs report for March 2021 shows that big business represented the smallest contributor to labor market gains yet benefitted the most from federal relief loans and funds, as well as remote work and automation. Therefore, productivity metrics for large companies went up while wage distribution (i.e. wage growth from the employee’s perspective) remained flat.

That’s a deflationary dynamic, not inflationary.

Therefore, whether you look at the technical dynamics of Dogecoin (via Bitcoin’s bid-ask spread) or the broader fundamentals, it all seems to imply that a correction is near. Of course, the decision rests with you – just be careful out there if you’re going to dive in.

On the date of publication, Josh Enomoto held a long position in DOGE and BTC (to be clear, the author has an extremely small position in DOGE and is currently digesting news related to BTC) and is short TSLA.

A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.