Bitcoin has taken a breather, a rest if you will, from its strong rise this year. Far from over, we still believe there is significant ground to take, especially when one looks at the stock-to-flow model. Ethereum, a smart contract platform, has also recently hit new highs primarily due to its usefulness and ability to create and enable other blockchain projects. If you’ve been a reader of this blog, then you know at TRADECRAFT we’re a fan of both of these crypto assets along with select others. I’ve unpacked why in previous writings and will continue to do so in the future – in fact I really wanted to dedicate this writing to Ethereum and what is happening with it. However, that will have to wait as it’s time to do something a little different.
It’s time to talk about dogecoin. We’re asked about doge every day at TRADECRAFT and, no, we don’t hold any in our portfolio, which often begs a “why not?”
It’s a simple answer. It’s the difference between investing in an asset that has sound and solid fundamentals and going to Vegas and betting on Red 5 at the roulette table. You can make money at roulette – and some people have – but let’s call it what it is and not conflate the two topics. Hope is not a sound investment strategy.
Elon Musk, who appeared on Saturday Night Live this past weekend, has been hyping dogecoin (though, from response to the SNL episode, not very well). If you’re going to have a self-appointed spokesperson he’s not a bad choice, but promotion and hype do not a sound investment strategy make and there are significant fundamental differences between bitcoin and dogecoin.
Before I begin to unpack this however, and for those that simply view a Musk endorsement as gospel it’s worth noting that Tesla very publicly bought $1.5B in Bitcoin… not dogecoin. I’ll just let that speak for itself for a moment.
It’s not hard to see why when one looks under the covers as the differences are stark. Bitcoin has built-in scarcity, which is a supply of no more than 21 million coins. As we’ve all seen from the stock-to-flow model that is a key informer to our investment model, scarcity combined with demand can lead to value creation. Dogecoin, by contrast, has an unlimited supply. There are currently approximately 113 billion dogecoin in circulation and 10,000 new doge are being minted every minute. That’s 5B new doge a year! When Elon Musk was asked whether this poses a danger to dogecoin price he replied “Yes it Does.” Fundamentally, there is no model I am aware of where unlimited supply of anything leads to value creation.
Next, let’s turn to inception. Bitcoin was created as a new financial paradigm of self-sovereign money designed to emulate gold while incorporating the best parts of the digital age. Its’ been viewed over time as a hedge against monetary inflation and that’s one of the key things that have driven so many prominent investors and firms to the asset. Trust has grown, institutional adoption has taken hold, and many view Bitcoin as being a harbinger of transformation of our banking system, which was one of its intended outcomes. Dogecoin, by contrast, is a fork (copy) of a fork (copy) of bitcoin and was created as a joke. Seriously. It was a tweet from cofounder Jackson Palmer that was picked up by cofounder Billy Markus, both engineers, who went on to create a currency based on a popular doge (Shiba Inu) meme back in 2013. They were proud of the fact that it had no distinguishing characteristics from many of the other bitcoin clones and Marcus said in a recent post it was “created for sillies.” It was designed for fun and to be a parody of other crypto assets, and they are as surprised as many that doge has had the rise it has. (In fact, Palmer liquidated all of his doge in 2015!)
Finally, let’s look at security. Dogecoin’s network, which has had periods of spotty development over the years and is roughly 300 terahashes across 1,300 nodes. Bitcoin’s network is 161 exahashes (161,000,000 terahashes) over 10,000 nodes distributed across 97 countries. That’s approximately eight times the nodes and over 500,000 times the computing power. Cutting through the technospeak, simply put, that makes dogecoin much less secure and open to attack. On top of that, the last major update to the actual dogecoin software was in November 2019. While there is interest in getting back on track this does not mean that it is, in fact, on track. In the world where the point is to be a secure asset it is, perhaps, not so secure.
Not all businesses succeed
Moving away from specifics, let’s look at the general marketplace for a second. The world of crypto assets is game-changing. Bitcoin endorsements from Fidelity, Bloomberg, PayPal, Paul Tudor Jones, Michael Saylor, Blackrock — and the list goes on and on – see this and are encouraging others to pay attention. This does not mean that every single crypto asset under the sun is an excellent investment.
Back in the advent of the internet, there were many .com companies that looked like the holy grail and then went bust. That did not mean the fundamental framework of the world wide web and how it would change us was flawed. It just meant that some projects (Amazon) flourished in an unprecedented way, while others (Pets.com) didn’t, even if there were days Pets.com traded higher. Some individuals probably made money on the ones that went bust but that does not mean they were good investments. In the world of investing one needs to ask “what am I investing in.” We believe a sound strategy is to invest in the future, not just in what is shiny in the moment.
People have – and probably will – make a ton of money on coins that aren’t going to go the distance. Certainly, a lot of people have on dogecoin.
We just happen to think that crypto assets, like any other well considered investment, should have solid fundamentals, a unique selling proposition that distinguishes it in the marketplace, a demonstrated need that it is satisfying, a functional and active team, a defensible moat and, importantly in the crypto world, tokenomics that promote value creation.
That’s how we do asset selection and build our portfolio at TRADECRAFT, focusing on crypto assets that are going to drive innovation and transformation in the Age of Autonomy. It’s the difference between investing in the foundational elements of the next technological revolution and, well, hoping for luck.
This has gone long but with so much press and news lately I thought it important to give some perspective, or at least our perspective, here at TRADECRAFT.
As always, be well, stay safe, and we’ll continue to Decrypt: Crypto for you!