Underlying value of Dogecoin is really nothing

Dogecoin is a fantastic bubble to watch as an investment. But, it can clearly demonstrate the philosophy of money and the human trust factor in our current economic systems. The coin started as a fun way to use blockchain technology and it is ironic we are having serious conversations around this fun coin with more than 10,000% gains.

Dogecoin had a small market with a few crypto enthusiasts holding it and discussing it in Reddit groups. Its value stayed well below a fraction of a rupee for a long time. Fewer people talking about it, no software upgrades, and no one to really believe in it.

Then a few on the Reddit groups started experimenting with it. They set goals to reach certain price targets by collectively buying these coins, which were really cheap. At one point, even the founders publicly said Dogecoin is not a serious investment tool. But that didn’t stop people from joining the experiment to make it reach their price target.

‘Musk effect’

Then Elon Musk came into the picture and accelerated the experiment with his tweets. The idea was simple: if enough people believe in something, it will hold value. The fiat currencies we have today get their value in a similar way. A group of people like you and me decide to believe in a piece of paper as a token of value. When all citizens of a country believe in it, it retains that value and becomes a medium of exchange. We trust the caretakers of this piece of paper and trust their promise to manage the economy in a way that keeps the currency strong.

Dogecoin got its value in much the same way, but without a government. As more people bought it, its value increased. Eventually a few stores started to accept it as payment. When you look at the underlying value of Dogecoin, it really is nothing. It’s just a basic blockchain software that exists only to produce an infinite number of coins. If our central banks do the same thing, we get inflation and in extreme cases, a collapse of the currency.

In fact, it has happened before. Countries like Zimbabwe inflated its currency to the point where they were printing trillion dollar notes, which people still refused to accept. Brazil once had such a crisis of faith in its currency, the real, that the government issued a new one, with a slightly different name, and propped it up with measures like pegging it to the US dollar. People put their trust in the rebranded real and began to use it. If you look closely, it is the trust of people like you and me which turns into the price of something—be it a product, a coin, or a currency.

Investment option?

Should you invest in Dogecoin or not is another tricky question. You always invest in something you find value in. You buy an art piece because you see value in it and not everyone will like the same artwork. Investment decisions are also personal. However, most successful investors try to look for the underlying value of an asset and its potential to grow in the future. Among crypto assets, Bitcoin and Ethereum have strong underlying value. Both are breakthrough technologies which have fostered thousands of innovations.

Bitcoin, for example, brings in an immutable ledger (the blockchain, a trustless payment system, and transparent triple-entry accounting. Ethereum is a massive, decentralised computing platform for creating smart contracts, which can automate simple or complex sequences of decisions or transactions with better verification.

The value of Bitcoin and Ethereum also comes from people believing in their underlying technology and potential use cases. However, those use cases offer potential solutions to fundamental flaws in current systems. For that reason, they are great assets to hold for the long term. The simplest way to approach such long-term investments is an SIP model where you invest with small amounts of money at regular intervals. This way, you avoid trying to predict short-term highs and lows and instead get the best average entry price with less stress and effort.

(The writer is COO, ZebPay. Views expressed are personal)