Dogecoin (CRYPTO:DOGE) has been making headlines over the past few months for its staggering returns. Since the beginning of the year, the price of Dogecoin has soared by nearly 7,000% as of this writing. Over the last 12 months, it’s up by more than 15,500%.
By comparison, two of the biggest names in crypto, Bitcoin (CRYPTO:BTC) and Ethereum (CRYPTO:ETH), have seen their prices increase by around 300% and 1,000%, respectively, over the past year. While many cryptocurrencies have experienced record-breaking returns, Dogecoin is in a league of its own.
It’s hard to ignore numbers like these. However, just because an investment is earning sky-high returns doesn’t necessarily mean it’s a good idea to buy. Dogecoin may be too good to be true, and there’s one huge risk to consider before you invest.
A low price isn’t always a good thing
Cryptocurrencies like Bitcoin and Ethereum may be the biggest players in the crypto space, but they’re also expensive. Back in mid-April when Bitcoin reached its peak, it cost around $65,000 per token. Ethereum cost just over $4,000 per token at its peak in mid-May.
Dogecoin’s record high, however, was just $0.68. With a price that low, it’s one of the most affordable investments out there. And if you’re on the fence about investing, it can be tempting to buy Dogecoin simply because it’s cheap.
That can be an incredibly risky move, though, because affordable investments aren’t always good investments. If you buy Dogecoin just because it’s cheaper than its competitors, you could still end up losing money.
While all cryptocurrencies are risky, Dogecoin is one of the most dangerous investments. Before you even consider buying, it’s important to think about how this investment may pan out over time.
Will Dogecoin survive over the long term?
With any investment, the most important factor to consider is whether or not it’s likely to experience long-term growth. Long-term investments are more likely to bounce back after downturns and retain a competitive advantage in their industry.
Cryptocurrencies, in general, are still highly speculative. In other words, nobody knows for sure whether they’ll still be around in a few years or decades. Dogecoin, however, is especially risky because it doesn’t have as much utility as its competitors.
In order for any cryptocurrency to become mainstream, it must have some type of real-world use. Bitcoin is the most popular type of cryptocurrency, and it’s the type merchants are most willing to accept. That gives it a significant advantage because widespread adoption will be key to any cryptocurrency’s success.
Ethereum also has real-world utility through its blockchain technology. The Ethereum blockchain is not only host to its native token, Ether, but it’s also the network used by non-fungible tokens (NFTs), decentralized finance, and thousands of other applications. The Ethereum technology has the potential to revolutionize a variety of industries, and if it succeeds, its cryptocurrency, Ether, has a good chance of thriving as well.
Dogecoin, on the other hand, has very little utility right now. The few merchants that do accept crypto are more likely to accept Bitcoin than Dogecoin, and Dogecoin doesn’t have any major advantages over its competitors.
Will Dogecoin’s price continue to increase?
Of course, despite having very little real-world utility, Dogecoin’s returns have still outpaced its competitors. However, those gains are largely artificial, and they likely won’t last forever.
Part of the reason why Dogecoin’s price has soared is because it’s been heavily promoted online. Celebrity billionaires like Elon Musk and Mark Cuban have promoted Dogecoin on social media, and retail investors have invested in droves.
The more people who invest in an asset, the higher its price becomes. Dogecoin’s run is similar to the GameStop saga earlier this year when investors pumped up the stock price only to dump it shortly after in an attempt to make a quick buck.
With any investment, if the stock price doesn’t align with the underlying fundamentals, that’s a red flag. Dogecoin has little utility and no competitive advantage in the industry, yet its price has skyrocketed. That’s a sign that this growth won’t continue over the long run.
The price of Dogecoin has already taken a turn for the worse over the past couple of weeks. And unless it develops a way to stay competitive, there’s a good chance it won’t survive over time. So no matter how inexpensive it is, it’s still a dangerous investment.
Where should you invest instead?
Whether you choose to invest in cryptocurrency or stocks, it’s always a good idea to research an investment’s underlying fundamentals. Look beyond price, and try to determine whether the investment has real-world utility and a strong competitive advantage.
The best investments are the ones that are more likely to experience long-term growth. Dogecoin may not be the best investment right now, but there are plenty of safer options out there that still have the potential for higher earnings.
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.