Memes Can Shake Markets – The Rise Of Dogecoin Is Proof
OOne of the most difficult problems in finance today is determining the fundamental economic value of cryptocurrencies. And last week made it even more difficult.
For many cryptocurrency investors, the value of Bitcoin is based on the fact that it is artificially scarce. A strict cap on the “minting” of new coins means that there will only ever be 21 million Bitcoins. And unlike national currencies such as the Australian dollar, the rate of release of new Bitcoin slows down over time.
Dogecoin, a cryptocurrency that takes its name and logo from a Shiba Inu meme that was popular several years ago, does not have a cap. Launched in 2013, there are now 100 billion Dogecoin, with up to five billion new coins minted each year.
But how can a currency with a seemingly unlimited supply have any value?
And why did the price of Dogecoin suddenly jump over 800% in 24 hours on January 29?
At the time of publication, ‘memecoin’ was worth around A $ 5.6 billion on the stock exchange.
A long-standing joke that comes to life
Dogecoin is one of the original ‘altcoins’: cryptocurrencies released a few years after the pseudonym Satoshi Nakamoto first released Bitcoin in the wild.
From a technical point of view, Dogecoin is not very innovative. Like many early altcoins, it is based on the original Bitcoin source code.
Or more technically, it’s based on Litecoin, which in turn was based on Bitcoin – but with a few small changes like faster transactions and the removal of the supply cap. But Dogecoin is much more interesting when viewed through a cultural lens.
Read also : The story of GameStop – how a group of investors on Reddit gave Wall Street a crazy week
The cryptocurrency was created by software engineers Billy Markus and Jackson Palmer – although Palmer, an Australian, has since moved away from the project. They branded it with the Doge meme in part to be funny, but also to steer it away from Bitcoin’s then questionable reputation as a currency for illicit transactions.
Now Dogecoin has outlived almost all of the early derivative altcoins and has a thriving community of investors. In 2014, Dogecoin holders sponsored the Jamaican bobsleigh team. Soon after, they sponsored a NASCAR driver.
Elon Musk, the richest man in the world, is among the leading advocates of cryptocurrency. In December of last year, a tweet from Musk sent the price of Dogecoin higher.
Collectivism leads to creativity
Reddit threads proclaim the value of Dogecoin as a new global currency. Musk himself shared a similar sentiment a few days ago. Speaking on the Clubhouse app, he said:
Dogecoin was made as a joke to poke fun at cryptocurrencies, but fate loves irony. The most ironic outcome would be for Dogecoin to become Earth’s currency in the future.
But Dogecoin is viewed better as a cultural product rather than a financial asset. The reality is that few cryptocurrency users consider it to be a serious investment or to be used in regular transactions. Instead, owning Dogecoin is like participating in a culture.
People buy it because it’s fun to have, it’s inherently fun, and provides a welcoming and enjoyable community experience.
If we start to think of cryptocurrency as a cultural product, the sudden rise in the price of Dogecoin last week makes sense. The boost came just after a memes-centric community managed to boost video game retailer GameStop’s share price from US $ 20 to US $ 350 in just a few days.
This swarm behavior was unlike anything seen before – and it spooked global financial markets.
One particularly interesting aspect of the Reddit r / WallStreetBets forum – which coordinated the attack on the hedge fund that actually bet on GameStop’s stock price drop – was the number of users having fun.
It’s no surprise that the activity surrounding Dogecoin has a similar vibe; it was designed to be fun from the start.
Read also : Even Indian retail investors are playing with GameStop, the American video game stock that has gone wild
Doge: internet icon
Some people participate in financial markets as a form of consumption – that is, for entertainment, recreation, and to experience community – just as much as they do for investing.
Cultural assets like Dogecoin are difficult to systematically value against financial assets, much like we don’t have a fundamental theorem to value art.
Almost by definition, the demand for memecoin will fluctuate as strongly as the internet culture itself, turning cultural bubbles into financial bubbles. RMIT professor and crypto-ethnographer Ellie Rennie calls these “fun infrastructures”.
By inspecting Dogecoin closely, we can learn a lot about the interplay of technology, culture, and economy.
Additionally, cryptocurrencies are extraordinarily diverse. Some are designed for small payments or to be resilient value holders. Others protect financial privacy or act as an internal token to manage smart contracts, supply chains or power grids.
Under the hood, Bitcoin and Dogecoin almost look the same. Their code differs only in a few parameters. But their economic functions are almost entirely opposite.
Bitcoin is a kind of “digital gold” adopted as a secure hedge against political and economic uncertainty. Dogecoin, on the other hand, is a meme that people add to their digital wallets because they think it’s funny.
But in an open digital economy, memes move markets.
Jason Potts, Professor of Economics, RMIT University and Chris Berg, Principal Investigator and Co-Director, RMIT Blockchain Innovation Hub, RMIT University
This article is republished from The Conversation under a Creative Commons license. Read the original article.
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