2021-03-30 17:02:25

Investors Should Sell the Bubble Within a Bubble Called Dogecoin

The opposition of governments and large banks to cryptocurrencies is likely to prevent them from ever going mainstream. As a result, the cryptocurrencies, including Dogecoin (CCC:DOGE-USD), are overvalued at their current levels and have probably reached “bubble” status.

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I also agree with most of the bearish points that Bank of America recently made about Bitcoin (CCC:BTC-USD) , And with Dogecoin one of the cryptocurrencies that’s least likely to attain widespread adoption, I recommend that investors sell the currency now.

Washington Will Stymie Widespread Adoption of Cryptos

There are multiple signs that the U.S. government is opposed to the widespread adoption of cryptocurrencies.

For example, in February, Treasury Secretary Janet Yellen calledBbitcoin “extremely inefficient,”  and in March, Fed Chairman Jerome Powell labeled  cryptocurrencies “highly volatile” and “not really useful stores of value.”

The reality is that governments can take steps which will make the widespread use of Bitcoin, Dogecoin, and other cryptocurrencies extremely impractical. For example, the IRS is forcing U.S. citizens to report any use of cryptocurrencies. And any transaction involving cryptos could, according to the IRS, result in a taxable capital gain.

The need to report all transactions involving cryptocurrencies, including bitcoin and dogecoin, to the IRS makes cryptos rather impractical to use for any purpose. After all, keeping careful track of every transaction is rather cumbersome.

And the fact that Americans can buy and use foreign fiat currencies without reporting those transactions to the IRS or paying taxes on them makes such currencies much more practical as hedges against inflation than cryptos.

Further, the U.S. government’s hostility to Bitcoin, Dogecoin and other cryptocurrencies is likely to prevent most businesses and other individuals from ever accepting them in exchange for goods and services. After all, it’s theoretically possible for the government to take other steps that will hinder the use of cryptos, and Washington could even theoretically make them illegal.

Banks Will Stymie Widespread Adoption of Cryptos

Also likely to hurt cryptos is large banks’ hostility to them. As I’ll describe below, Bank of America recently issued an extremely bearish note on cryptos.  And JPMorgan CEO Jamie Dimon  in 2017 memorably referred to bitcoin as “a fraud.”

It’s easy to understand why banks are opposing cryptos. The reason is that financial institutions make a great deal of money from the current fiat currency system; for example, they generate revenue by enabling businesses to exchange one fiat currency for another and by allowing companies to hedge against the  fluctuations of fiat currencies. So why would banks want to upend that system by replacing fiat currencies with cryptocurrencies?

And with banks opposing cryptos, consumers won’t be able to pay their mortgages and credit cards with them. Meanwhile, businesses won’t be able to take out crypto loans or establish crypto checking accounts.

Bank of America Made Some Good Points

On March 17, Bank of America issued a note which argued that “Bitcoin has…become correlated to risk assets, it is not tied to inflation, and remains exceptionally volatile, making it impractical as a store of wealth or payments mechanism.” The bank also contended that Bitcoin prices have risen based on large purchases of the cryptocurrency by a few institutions. Further, Bank of America stated that the sole reason to buy the crypto is in order to profit when its price climbs.

I agree with most of those arguments. I haven’t seen any evidence that cryptos usually climb when inflation or fears of inflation increase. And cryptos are certainly prone to extremely sharp drops that make them impractical as a method of storing wealth. Finally, I believe that, since the opposition of governments and banks will prevent cryptos from ever being used as real currencies on a widespread basis, I do think the only economically valid reason for buying them is because their value may go up.

The following statement will probably cause some  crypto lovers to send me angry messages. But the truth is, I think the main force propelling cryptos higher is their “coolness” factor. Specifically, many consumers and some companies are buying cryptos like Bitcoin and Dogecoin primarily because they are viewed as “cool.”

In that way, the crypto craze reminds me of Holland’s 17th century tulip bubble. That bubble, which was created because the Dutch became enamored with the beauty and rareness of tulips, definitely ended in tears. (But, just as some crypto investors have made a great deal of money, many Dutch citizens made a lot of money on tulips back then).

I think the same thing could happen with cryptos once consumers realize that they will likely never become used on a widespread basis and once different “cool” objects attract the attention of tens of millions of Americans.

Dogecoin Is Even Less Likely Than Bitcoin to Be Used for Millions of Purchases

Other InvestorPlace columnists have gone into great detail on how Dogecoin is much more volatile and less reliable than Bitcoin and other cryptos.  For example, in his March 17 article, Bret Kenwell wrote, “Dogecoin is fine for speculators, but investors seeking more stability in cryptocurrency assets will want to consider something else.”

Much more scathing was Vince Martin, who in his March 19 column wrote, “{Dogecoin} is a cryptocurrency conceived as a joke based on an Internet meme. It’s a cryptocurrency with basically zero interest from developers. It’s a cryptocurrency that already blew up once, and whose narrow use case no longer even exists.”

The Bottom Line on Dogecoin

Due to the opposition of governments and banks to cryptocurrencies, cryptos probably will never go mainstream and the crypto bubble will likely burst. Meanwhile, Dogecoin appears to be a rare bubble within a bubble, so it’s extremely likely to burst sooner rather than later.

On the date of publication, Larry Ramer  did not have (either directly or indirectly) any positions in the securities mentioned in this article. 

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