I’m not a fan of so-called meme coins (speculative cryptocurrencies with small market caps and little real-world use cases) for long-term investing. They certainly aren’t anything I would keep in a well-diversified investment portfolio.
That being said, it’s hard to deny their explosive growth recently. The most beloved one of them all, Dogecoin, is up an astonishing 3,025.75% YTD. Dogecoin might not have great fundamentals, but it has momentum, backed by one of the most powerful catalysts in recent investing history: Elon Musk tweets.
Why is Dogecoin so volatile?
It turns out that when the richest, most eccentric, business technocrat in the world tweets to his audience of millions about a particular asset, it does well. A combination of memes, the fear of missing out (FOMO), and herd mentality causes retail investors and Elon fans to buy like crazy whenever he tweets. The coordinated buying action sharply drives prices upwards.
However, such a pump is not based on a fundamental increase in the value of the asset but rather on simple supply and demand. As buying dries up, the pump slows, stagnates, and eventually the price plummets, as buyers cash out and take profit. An unlucky few are usually left holding the bag after mistiming the rally and buying at the top.
Is now a good time to buy?
Dogecoin is currently down -41.13% over the last six months and -25.35% over the last month. Recently, it surged nearly 31% from US$0.16 to US$0.22 on December 14 when Elon tweeted that it could be used to purchase merchandise. Since then, it has fallen to US$0.18.
Dogecoin currently has about $127 billion coins in circulation, with no upper limit to the number that can be created. It also has scant defi (decentralized finance) use cases. Its volatility precludes it as a reliable store of value. However, as a swing trading instrument, it could have good potential.
That being said, the best time to buy an asset for a swing trade is after a recent dip. While buying at all-time-highs or during the pump is a recipe for disaster, buying the dip could be a good way to establish a decent entry price in anticipation for an upcoming pump.
The Foolish takeaway
If a trader is skilled and knowledgeable enough to identify the bottom of a bearish pattern, they could accumulate Dogecoin at that price. Sooner or later, an inevitable Elon tweet would send the price skyrocketing.
However, the big caveat is “if.” Not many investors are able to pull this kind of technical analysis and market timing off. For a long-term oriented portfolio, Dogecoin may not be the best investment, as there are numerous other cryptocurrencies out there with less volatility and more use cases and that act as better stores of value.
That being said, Elon seems to disagree.
