There has been quite a bit of analysis and speculation on Dogecoin (CCC:DOGE-USD) so far this year, much of it mostly worthless analysis as the digital coin is not a business with revenues and cash flow. The only question that remains in my opinion is when and how fast Dogecoin returns to zero — or very close to zero –and subsequently stays there forever.
Created in 2013 as a joke by two developers — IBM software engineer Billy Markus and Adobe software engineer Jackson Palmer — Dogecoin has grown from a fraction of penny to a high of 74 cents and today sits at 31 cents. The current market capitalization of outstanding coins is $40.5 billion, which is greater than all but 200 of the publicly traded companies in the U.S.
Year-to-date gains for DOGE have been more than 7,600%, a stunning if not insane statistic. DOGE of course has no intrinsic value or business cash flows. Examples of it being used as an actual currency is minuscule to non-existent. It is the ultimate speculative meme trading stock. Back in the old days, we just called it a penny stock and that was all the description one needed to recognize its riskiness.
It is of course absolutely ridiculous for any sane or educated person to own DOGE. Akand Sitra of the cryptocurrency risk management platform TRM Labs claims that Dogecoin itself is a scam, with over 65% of Dogecoins held in the top 98 wallets across the world. The largest wallet holds 28% of all Dogecoins, and the top five wallets control 40% of the coin’s entire supply.
Not-Great Track Record of Day Trading
Most investors (sorry… traders) that own DOGE are day traders or swing traders. But market performance is determined over a complete market cycle, not just a five- or 10-year bull market. As the saying goes, don’t confuse brains with a bull market.
It is estimated that nearly 80%-85% of intraday traders end up losing money in the stock markets. Normally, 70% of the intraday traders do not last beyond the first year and 90% do not last beyond the third year. The last day-trading frenzy in the 1999 wiped out most accounts in 2000 and 2001.
In early May, I offered that we are close to a speculation-driven market top and DOGE is one of the strongest signals of a speculative top.
- The Shiller CAPE price-to-earnings (P/E) ratio is at more than twice its historical average.
- Margin debt at brokerage firms is at all-time highs.
- $5.3 trillion in stimulus was given out over the past 15 months, which won’t be repeated. According to surveys, 40% of this went into the stocks.
- The number of unprofitable companies is at the highest level since 1999.
- The months ahead potentially threaten the devastating effect of inflation on consumers and companies.
- The price-to-sales (P/S) ratio for the S&P 500 index is at an all-time high.
- The market-capitalization-to-GDP ratio is at an all-time high.
Danger Ahead
So here’s how the Dogecoin disaster will play out. There will be some trigger point where DOGE halves to 20 cents. Could be margin calls, could be a global economic crisis or could simply be that investors (…sorry, er, traders), recognize that this is all just silly. So at 20 cents the BTFD crowd jumps in, because, well, that’s what BTFD people do. Because honestly it’s worked for over 10 years!
But then DOGE halves again to a dime for the same reasons listed above. The BTFD crowd will make another fighting stance, but external forces such as money supply, margin calls and broker-dealer regulations will take hold.
However, it’s at 5 cents where the BFTD crowd and DOGE lovers in general start to get worried. The world has changed as the S&P 500 has now declined 40%. Bitcoin is under $10,000. But gold seems to be doing well. And it appears cash flow-generating companies with a good business model seem to be doing well.
At that point, DOGE will trade under a penny. Some people have gotten lucky, but most have not. History never repeats itself exactly, but it does rhyme.
On the date of publication, Tom Kerr did not hold a position in any security mentioned in the article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Tom Kerr, CFA, is an experienced investment manager and business writer who has worked in the investment and securities business since 1994.