Dogecoin is a joke cryptocurrency that on Tuesday was briefly worth $54 billion. Is that a sign that the entire market is in a phase of wild excess? My answer: On its own no—but with some major caveats.Before explaining, start with the joke. Pretty much every serious person who mentions dogecoin points out that it was created as a parody, back when dozens of new e-coins were being set up. That is true, but shouldn’t be a barrier: If something is useful, the intent of its founders shouldn’t put us off. The first woman elected to public office in the U.S. only got there because she was nominated as a prank.
drunken creation of FaceMash, a way for his peers at Harvard to rate the attractiveness of female students. And if the intent of the creator mattered, bitcoin would rank as a total failure, since it was created to allow small online payments, and instead is hoarded or used for speculation.
Dogecoin has found a use, of sorts, as a way of tipping Reddit users for funny or informative social media posts, and in principle is a perfectly good cryptocurrency, as these things go.
This isn’t to endorse its value. It is dominated by a bunch of people having a laugh and putting money behind the joke, while others are wagering on the outcome—leading to the huge surge and huge fall Wednesday. It is no more likely to replace the dollar than are betting slips for the Kentucky Derby.
Dogecoin’s price quadrupling in two days last week is surely a sign that there is wild excess in the cryptocurrency. But that isn’t proof that stocks or bonds are hideously overpriced: There is almost always wild excess in something, because that is the way markets work.
Part of the genius of public markets is that they harness the human desire to gamble, in order to provide liquidity. This means there is usually someone willing to buy or sell when long-term investors need to put more money to work or cash in. The unwanted side effect is that the gambling often sets the price, in the form of bubbles and stock momentum taking prices far away from the real value of the business.
Dogecoin, and the broader mania for crypto tokens, is a bubble, but that doesn’t necessarily mean much for the rest of the market. Mini-bubbles are frequent in the stock market when traders unthinkingly buy into a new fad: 3-D printing was briefly in fashion in 2013, with the stock of leader
almost tripling, while rare-earth metals stocks leapt fivefold or more before crashing in 2011. Neither pointed to broad market excess and the same may be true of dogecoin.
Here we come to the serious caveats. Dogecoin isn’t alone. It is clearly part of a broader wave of excess that spread across a bunch of different speculative assets over the past year. I am hopeful that the overheating isn’t cooking up trouble in the rest of the market, but it is definitely a risk.
Like other cryptocurrencies, dogecoin is perfect for speculation, with minimal regulation, no fundamentals to limit prices and wild swings. The gambling instinct can only push stock prices up for so long, because eventually the fundamentals of the business reveal themselves and provide a basis for valuation.
Last year, stocks with less in the way of fundamentals, and more reliance on telling a hard-to-disprove story about the future, had a fabulous time. Profit provides a grounding for a stock, while story stocks can soar on the wings of the imagination for a long time before being pulled back to earth—or occasionally confirmed as true fliers—by hard business facts.
Dogecoin’s combination of get-rich-quick speculators and you-only-live-once Reddit meme traders is similar to
which was initially pushed up by a story about a new business model and then a short squeeze, before nihilistic Redditors took over.
WSJ looks at why online investors poured money into meme-inspired dogecoin. (Originally published Feb. 8)
The story stock of the last decade was electric-car maker Tesla, with the tale being that there was a gigantic untapped market for self-driving electric cars and clean power that would eventually both work and be highly profitable.
Last year, plenty of would-be competitors became the latest chapter as their shares leapt, along with clean-energy stocks, special-purpose acquisition companies, crypto-related stocks and cannabis companies. New highs were reached (sorry), but the upward momentum petered out in January and February for most of them.
In principle, none of this is a problem for those of us not betting on the speculative booms. There is a good argument that the stuff that most investors focus on—old-fashioned stocks—are reasonably well supported by the fundamentals of a stronger economy and low bond yields, even if they are at record highs. Of course, if those fundamentals worsen, as the global economic outlook has with the recent surge in Covid-19 in many countries, stocks should pull back.
The danger is that the excess so obvious in dogecoin has spread beyond the story stocks into mainstream investments, and that when eventually the froth is blown away, the rest of the market cools suddenly. That would be a bad joke.
Write to James Mackintosh at James.Mackintosh@wsj.com
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