The COVID-19 pandemic has made many people very poor. It has also made a few lucky investors very rich. On January 1, 2021, Dogecoin, a meme cryptocurrency created in 2013, was worth .005 cents per coin – each coin one-two hundredth of a cent. At its peak in early May, however, the coin had reached a peak of seventy-four cents, an increase of nearly 15,000 percent over four months. If you had invested December’s $600 stimulus check in Dogecoin that day, and withdrew it at its highest point, you would have $90,000.
Indeed, as the currency skyrocketed in value in the early months of 2021 – helped by the buzz surrounding the GameStop short squeeze coordinated by Reddit forum r/wallstreetbets – hype built up around it, and more investors helped to fuel its increase.
However, those who subscribed (subshibed?) to the belief that the currency was destined to hit $1 per coin were disappointed. Tesla CEO Elon Musk, who extensively promoted the cryptocurrency in the run-up to his May 8 appearance on Saturday Night Live, joked there that Dogecoin was “a hustle”, leading the price to collapse overnight. As of this writing, the token trades at approximately 40 cents per coin; tomorrow it could be 30 cents, or 50 cents, or a dollar, or one-two hundredth of a cent, as it was at the beginning of the year.
The token’s precipitous rise – and chaotic fall – shows the allure, and the drawbacks, of cryptocurrency as an investment. Cryptocurrencies are not like real-world goods, which have a tangible value and a purpose. Nor are they similar to stocks, which, while not tangible, are backed by companies with tangible assets – either brick-and-mortar businesses and machinery, or the ownership of useful intellectual property – that could be sold to provide some recompense for investors.
Instead, crypto advocates claim that their tokens are a “store of value” – without any intrinsic use, but easily recognizable and tradeable, much like dollar bills. But, as with stock, the dollar is backed by the government of the United States – which is, at its core, a massive bureaucracy with tangible assets to shore up the value of the greenback.
By contrast, no one backs Dogecoin, or any other cryptocurrency. As an online currency, it has an exchange rate with the U.S. dollar, but that exchange rate is purely speculative. This explains why it is normal for currencies to fluctuate wildly within the span of a day; to a much greater degree than any other form of investment, their value is purely based on what public opinion believes it to be.
None of this is to say that cryptocurrencies are poor investments. More established currencies such as Bitcoin are widely circulated enough the the odds of an extreme price change at one moment have decreased. Moreover, as recent months have shown, some cryptocurrencies have clearly been a very profitable source of investment to some Americans.
However, because there is no way to judge the future value of a cryptocurrency – it has no quarterly reports, profits or losses – such an investment is effectively a form of gambling. The major difference, though, is that a gambler has some idea of the likelihood of winning. A Dogecoin investor does not – in a day, he could be worth thousands of dollars more, or he could be worth nothing.
Trevor Filseth is a news reporter and writer for the National Interest.