There has been quite a bit of analysis and speculation about Dogecoin (CCC:DOGE-USD) so far this year much of the analysis is worthless as the digital coin is not a business with income and cash flow. The only question that remains in my opinion is when and how quickly Dogecoin returns to zero – or very close to zero – and stays there forever afterwards.
Created in 2013 as a joke by two developers – IBM software engineer Billy Markus and Adobe Software engineer Jackson Palmer – Dogecoin rose from a fraction of a dime to a high of 74 cents and now stands at 31 cents. The current market capitalization of coins in circulation is $ 40.5 billion, which is higher than all but 200 publicly traded companies in the United States.
Earnings since the start of the year for DOGE were over 7600%, an astonishing if not crazy statistic. DOGE of course has no intrinsic value or corporate cash flow. Examples of use as real currency are tiny, if not nonexistent. This is the ultimate speculative action on memes. Back then we just called it a penny stock and that was all the description one needed to recognize its risk.
It is of course absolutely ridiculous for any sane or educated person to own DOGE. Akand Sitra of the cryptocurrency risk management platform TRM Laboratories claims that Dogecoin itself is a scam, with over 65% of Dogecoins held in the world’s top 98 wallets. The largest wallet holds 28% of all Dogecoins, and the top five wallets control 40% of the coin’s total supply.
Not very good day trading history
Most investors (sorry… traders) who own DOGE are day traders or swing traders. But market performance is determined over a full market cycle, not just a five- or 10-year bull market. As the says the proverb, don’t confuse brains with a bull market.
It is valued that almost 80-85% of intraday traders end up losing money in the stock markets. Normally, 70% of intraday traders do not last beyond the first year and 90% do not last beyond the third year. The last day trading frenzy in 1999 wiped out most accounts in 2000 and 2001.
At the beginning of May, I offered that we are close at a speculative market peak and DOGE is one of the strongest signals of a speculative peak.
- Shiller CAPE’s price-to-earnings (P / E) ratio is greater than twice its historical average.
- Brokerage margin debt is at all-time highs.
- $ 5.3 trillion in stimulus has been handed out over the past 15 months, which will not be repeated. According to surveys, 40% of that went into inventory.
- The number of unprofitable businesses is at its highest since 1999.
- The coming months potentially threaten the devastating effect of inflation on consumers and businesses.
- The price / sales ratio (P / S) for the S&P 500 Index is at one absolute record.
- The market capitalization / GDP ratio is at a absolute record.
Danger straight ahead
So here is how the Dogecoin disaster will unfold. There will be a trigger point where DOGE halves to 20 cents. It could be margin calls, could be a global economic crisis, or could just be that investors (… sorry, uh, traders), recognize that this is all just plain silly. So at 20 cents a BTFD the crowd comes in, because, well, that’s what the folks at BTFD do. Because honestly it has been working for over 10 years!
But then DOGE cut back to half a dime again for the same reasons listed above. The BTFD crowd will take another fighting stance, but external forces such as money supply, margin calls, and broker and broker regulation will prevail.
However, it is at 5 cents that the BFTD crowd and DOGE enthusiasts in general start to worry. The world has changed as the S&P 500 has now fallen 40%. Bitcoin costs less than $ 10,000. But gold seems to be doing well. And it looks like cash-generating companies with a good business model seem to be doing well.
At this point, DOGE will trade for pennies. Some people got lucky, but most didn’t. History never repeats itself exactly, but it rhymes.
As of the publication date, Tom Kerr does not hold any position in any of the stocks mentioned in the article. The views expressed in this article are those of the author, subject to InvestorPlace.com Publication guidelines.
Tom Kerr, CFA, is an experienced investment manager and business writer who has worked in the investment and securities industry since 1994.