Dogecoin (CRYPTO: DOGE) has had one heck of a year so far. This month alone, its price is up nearly 700%. Since the beginning of the year, it's soared more than 8,500%, as of this writing.
It's hard to ignore those types of returns, and many investors are scrambling to jump on the cryptocurrency bandwagon in hopes of getting rich. While it's possible that some investors could make a lot of money with Dogecoin, it's not right for everyone.
If you're considering investing in Dogecoin, be sure you've done your homework first. There's one reason you may want to invest and two reasons to avoid it entirely.
Why invest in Dogecoin
1. You have cash to spare and are willing to gamble with it
If you had invested $1,000 in Dogecoin on Jan. 1, 2021, you'd have approximately $85,000 today. The cryptocurrency has been unpredictable up until now, so it's anyone's guess how high the price will climb. If you're lucky, you could potentially make a bit of money by investing now.
Keep in mind that there's very little chance Dogecoin will make for a solid long-term investment. So, if you choose to invest, think of it as an experiment just for fun. Only invest money you can afford to lose, and go into it with zero expectations. If Dogecoin's price continues to climb, that's great. But don't be surprised if you lose more than you gain.
Why avoid Dogecoin
1. Its fundamentals aren't as strong as other currencies
There are many different types of cryptocurrencies, and it's easy to lump them all together and assume they're the same. However, investing in Dogecoin is very different from investing in a more established digital currency like Bitcoin (CRYPTO: BTC).
Dogecoin was created as a joke in 2013. Though it has experienced real gains since then, it's not nearly as strong as other currencies.
For example, one reason investors are attracted to Bitcoin is that there are only 21 million tokens available. A limited supply of the cryptocurrency increases its value, and some experts refer to Bitcoin as “digital gold.” Dogecoin, on the other hand, has 129 billion tokens in circulation. With so many tokens available, that reduces its value.
In addition, very few merchants accept cryptocurrency in general. But the ones that do are more likely to accept Bitcoin than Dogecoin. Without widespread adoption, it will be difficult for Dogecoin's growth to be sustainable.
Finally, there isn't much that sets Dogecoin apart from its competitors. Bitcoin has the longest track record and the most name recognition, giving it an edge. Ethereum (CRYPTO: ETH) is the second-most popular cryptocurrency after Bitcoin, and its blockchain technology is used for non-fungible tokens (NFTs) and decentralized finance — giving it an advantage outside of cryptocurrency. And lesser-known cryptocurrencies like Litecoin, Nano, and Stellar have lower transaction fees than Dogecoin.
All this is to say that Dogecoin doesn't have a competitive advantage in the crypto space, which means it will be difficult for it to grow over the long run.
2. It's likely the bubble will burst soon
Given the fact that there's nothing about Dogecoin to warrant its phenomenal returns over the past few months (other than celebrity endorsements and internet hype), all signs point to a bubble that will burst sooner or later.
Dogecoin is not all that different from stocks like GameStop and AMC — companies that saw their stock prices explode essentially overnight, even though their business fundamentals didn't warrant that type of growth.
Similar to GameStop and AMC, Dogecoin's meteoric rise is mostly due to retail investors hyping it up online, fueled by celebrities like Elon Musk promoting it on social media. And like GameStop and AMC, it's likely only a matter of time before the Dogecoin bubble bursts.
While there's a chance Dogecoin could become a real player in the crypto space, it's more likely it will crash and burn. If you have cash to spare and are curious about investing for fun, it doesn't hurt to put a little money toward Dogecoin — after all, you never know what might happen. But there are plenty of other investments out there that are far better options.
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Katie Brockman has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Bitcoin. The Motley Fool has a disclosure policy.