Dogecoin Disrupts Bitcoin!

Two topics I've posted about recently, Elon Musk's cult and the illusory "prices" of cryptocurrencies, just intersected in spectacular fashion. On April 14 the Bitcoin "price" peaked at $63.4K. Early on April 15, the Musk cult saw this tweet from their prophet. Immediately, the Dogecoin "price" took off like a Falcon 9.

A day later, Jemima Kelley reported that If you believe, they put a Dogecoin on the moon. That was to say that:

Dogecoin — the crypto token that was started as a joke and that is the favourite of Elon Musk — is having a bit of a moment. And when we say a bit of a moment, we mean that it is on a lunar trajectory (in crypto talk: it is going to da moon).

At the time of writing this, it is up over 200 per cent in the past 24 hours — more than tripling in value (for those of you who need help on percentages, it is Friday afternoon after all). Over the past week it’s up more than 550 per cent (almost seven times higher!).

The headlines tell the story — Timothy B. Lee's Dogecoin has risen 400 percent in the last week because why not and Joanna Ossinger's Dogecoin Rips in Meme-Fueled Frenzy on Pot-Smoking Holiday.

The Dogecoin "price" graph Kelly posted was almost vertical. The same day, Peter Schiff, the notorious gold-bug, tweeted:

So far in 2021 #Bitcoin has lost 97% of its value verses #Dogecoin. The market has spoken. Dogecoin is eating Bitcoin. All the Bitcoin pumpers who claim Bitcoin is better than gold because its price has risen more than gold's must now concede that Dogecoin is better than Bitcoin.

Below the fold I look back at this revolution in crypto-land.

I'm writing on April 21, and the Bitcoin "price" is around $55K, about 87% of its peak on April 14. In the same period Dogecoin's "price" peaked at $0.37, and is now around $0.32, or 267% of its $0.12 "price" on April 14. There are some reasons for Bitcoin's slump apart from people rotating out of BTC into DOGE in response to Musk's tweet. Nivesh Rustgi reports:

Bitcoin’s hashrate dropped 25% from all-time highs after an accident in the Xinjiang region’s mining industry caused flooding and a gas explosion, leading to 12 deaths with 21 workers trapped since.
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The leading Bitcoin mining data centers in the region have closed operations to comply with the fire and safety inspections.

The Chinese central authority is conducting site inspections “on individual mining operations and related local government agencies,” tweeted Dovey Wan, partner at Primitive Crypto.
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The accident has reignited the centralization problems arising from China’s dominance of the Bitcoin mining sector, despite global expansion efforts.

The drop in the hash rate had the obvious effects. David Gerard reports:

The Bitcoin hash rate dropped from 220 exahashes per second to 165 EH/s. The rate of new blocks slowed. The Bitcoin mempool — the backlog of transactions waiting to be processed — has filled. Transaction fees peaked at just over $50 average on 18 April.

The average BTC transaction fee is now just short of $60, with a median fee over $26! The BTC blockchain did around 350K transactions on April 15, but on April 16 it could only manage 190K.

It is also true that DOGE had upward momentum before Musk's tweet. After being nearly flat for almost a month, it had already doubled since April 6.

Kelly quotes David Kimberley at Freetrade:

Dogecoin’s rise is a classic example of greater fool theory at play, Dogecoin investors are basically betting they’ll be able to cash out by selling to the next person wanting to invest. People are buying the cryptocurrency, not because they think it has any meaningful value, but because they hope others will pile in, push the price up and then they can sell off and make a quick buck.

But when everyone is doing this, the bubble eventually has to burst and you’re going to be left short-changed if you don’t get out in time. And it’s almost impossible to say when that’s going to happen.

Kelly also quotes Khadim Shubber explaining that this is all just entertainment:

Bitcoin, and cryptocurrencies in general, are not directly analogous to the fairly mundane practice of buying a Lottery ticket, but this part of its appeal is often ignored in favour of more intellectual or high-brow explanations.

It has all the hallmarks of a fun game, played out across the planet with few barriers to entry and all the joy and pain that usually accompanies gambling.

There’s a single, addictive reward system: the price. The volatility of cryptocurrencies is often highlighted as a failing, but in fact it’s a key part of its appeal. Where’s the fun in an asset whose price snoozes along a predictable path?

The rollercoaster rise and fall and rise again of the crypto world means that it’s never boring. If it’s down one day (and boy was it down yesterday) well, maybe the next day it’ll be up again.

Note the importance of volatility. In a must-read interview that New York Magazine entitled BidenBucks Is Beeple Is Bitcoin Prof. George Galloway also stressed the importance of volatility:

Young people want volatility. If you have assets and you’re already rich, you want to take volatility down. You want things to stay the way they are. But young people are willing to take risks because they can afford to lose everything. For the opportunity to double their money, they will risk losing everything. Imagine a person who has the least to lose: He’s in solitary confinement in a supermax-security prison. That person wants maximum volatility. He prays for such volatility, that there’s a revolution and they open the prison.

People under the age of 40 are fed up. They have less than half of the economic security, as measured by the ratio of wealth to income, that their parents did at their age. Their share of overall wealth has crashed. A lot of them are bored. A lot of them have some stimulus money in their pocket. And in the case of GameStop, they did what’s kind of a mob short squeeze.
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I see crypto as a mini-revolution, just like GameStop. The central banks and governments are all conspiring to create more money to keep the shareholder class wealthy. Young people think, That’s not good for me, so I’m going to exit the ecosystem and I’m going to create my own currency.

This all reinforces my skepticism about the "price" and "market cap" of cryptocurrencies.

Update 5^th May 2021: Jemima Kelly returns to the subject with Dogecoin really is man’s best friend:

Doge’s performance over the past few months has made the bitcoin maximalists and other earnest crypto types who try to convince the world that crypto is a serious asset class very mad, though they want to pretend it hasn’t. Because, it does make them look a little silly doesn’t it?

But given that markets have been a joke for the past year or so, why shouldn’t a joke coin come out on top? In a world where nothing makes sense, this actually . . . kinda makes sense.