What is Dogecoin?

9.8.2022

Where does Dogecoin come from?

As “Doge” memes go viral time and time again, Jackson Palmer and Billy Markus launched “Dogecoin,” in December, 2013, capitalizing on that trend. As with many cryptocurrencies besides Bitcoin, Dogecoin is what is called a “fork,” and no, by that, we don’t mean one that you eat with. In the software world, a “fork” is a copy of the source code of one piece of software that has been altered to create what can be considered new, different software.

Dogecoin sprung from a fork of a little known and now defunct cryptocurrency called Luckycoin, which in turn, came from Litecoin. All in all, Dogecoin shares little with these two cryptocurrencies beyond its basic security features, which we discuss further below.  

Why and how is Dogecoin different from Bitcoin?

First, Dogecoin does not have a limited supply. In fact, it has no supply limit, averaging about 5 billion new coins minted a year. Like Bitcoin, Dogecoin is a Proof-of-Work-based cryptocurrency, which means that it has to be mined by specialized computers to be created. The cost of being a Dogecoin miner, however, is relatively cheap, with some estimating that you can reliably mine it on a personal computer as long as you have a GPU(graphics processing unit). While Bitcoin miners tend to have very thin profit margins related to their hardware and electricity costs, Dogecoin miners could potentially take home 75% of their revenue.

This is by no means a call for you to go out and mine Dogecoin simply based on these averages. As with any crypto-related endeavor, it’s important to do your own research and consider all of the potential risks such as tax implications and that mining tends to swiftly overheat computers that aren’t specifically built for it.

Beyond its low mining costs and almost unlimited supply, Dogecoin also differs from Bitcoin because it is secured by a different algorithm. While Bitcoin depends upon the SHA-256 algorithm to remain secure, Dogecoin depends upon an algorithm called Scrypt. Generally, Scrypt requires less hash power to achieve security, which means that Dogecoin should continue to need far less energy than Bitcoin for the foreseeable future.

If Bitcoin’s energy usage represents that of a small country, then Dogecoin’s energy usage represents that of a single city. While this makes Dogecoin easier to mine, it also makes it more susceptible to hacks, since doing so would cost somewhere in the range of $140-160,000 per hour. Hacking Bitcoin, on the other hand, would run over $1 million for the same amount of time.

As a general rule, all crypto networks that aren’t Bitcoin are easier to hack because they have less miners(or stakers/validators) involved with them.  

Wait, so why is Dogecoin valuable?

Dogecoin has a different value proposition from Bitcoin’s. If Bitcoin is “digital gold,” then Dogecoin is “meme gold.” Since January 2018, Doge has posted an ROI of over 2000%, buoyed by the fact that it was never meant to have any sort of value. Because it has always been affordable and represents a popular meme, it has managed to achieve long-term value up to this point. If you understand Burton Malkiel’s “Castles in the Air,” theory, then it’s even easier to pinpoint why this has occurred.

In his seminal work, “A Random Walk Down Wall Street,” Malkiel suggested that all investments fall into two categories, those that have “firm foundations,” and those that represent “castles in the air.” Overall, the industry consensus is that Dogecoin falls into the latter category, which includes all investments that gain value simply based on what the crowd is doing or “mass psychology,” instead of through generating real value in the form of sales, acquisitions, or other positive, economic events.

In short, think of it as a “behavioral investment,” or one that’s mainly valuable simply because it capitalizes off of one or more trends and you’re off to a good start. Though some merchants and e-shops do now accept Dogecoin, it still falls into such a model.

Network Effects: Another Case for Dogecoin’s Value

If you’re not yet familiar with the theory of network effects as it relates to valuing investments, then it’s time to get up to speed on it. Sahil Bloom puts it exceptionally well when he says, “a network effect is a phenomenon by which each incremental user of a product or service adds value to the existing user base.” What that means in the context of a cryptocurrency network like Dogecoin is “the more users, the more value the network, and by extent, its coin, has.”

Think of Facebook, Twitter, Whatsapp, and all of the other famous tech companies of the early 2000’s and you’ll get the picture of just how powerful of a value driver network effects are. Take Whatsapp, for example, which was purchased by Facebook for $16 billion in 2014, largely because it has 400 million active users.

Though user-based valuation became popular in the tech space, it is now a widely accepted framework in crypto as well, which can apply to Dogecoin and even Bitcoin itself, to an extent.

What are the risks of investing in Dogecoin?

Because Dogecoin is likely a purely behavioral play and has no real revenue-generating activities beyond its’ network growth, it is possible that one day, it will completely die out. So, although Dogecoin is a cryptocurrency, one helpful rule of thumb to use is a time-tested axiom of traditional investing.

“Never invest more than you can afford to lose.”

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