When I used to try to explain bitcoin to people, many would have a hard time getting over that it’s not real. “It’s just magic Internet money!” Perhaps just a good story crypto believers tell themselves. Surely these bitcoiners have gone mad.
Cryptonauts know that fiat money isn’t real either. At least not in the sense that it’s backed up by anything real. With over 20% of the US money supply having been printed since the start of 2020, people are starting to come to realize that the dollar is just a good story we collectively tell ourselves.
For us, the record bitcoin prices we are seeing are the destiny of a financial system gone mad. To quote Akira Kirosawa, “In a mad world, only the mad are sane.”
The world is catching up to the rest of us and with Coinbase going public, crypto is now mainstream. So too, is Doge. Even Fox News is talking about it. While I didn’t actually read this article, I imagine it says something like this:
Hot young news today as the Coinbase initial money grab gets gamblers stoked on Wall Street. Many are seeing this as a sweet solution to purchase a moonticket in a sexy new company for their post-work/pre-death account. Meanwhile, in an attempt to keep the supply of toilet paper in pace with demand, Big Money House Fed has amped up the money printers to brrrrrrr. Also fresh for your hearing holes this hour, Doge Coin is at record highs as HODLers say to haters “Have fun being poor!”
Here it goes again, Doge is at new record highs. It’s up almost 100% since last week and trying to go for 50% today. Why? Is it worth it? What are the underlying economics of Doge? Let’s take a look at Dogenomics.
Early History & Dogenomics
Dogecoin is nearly ancient in crypto-years. Founded on 06 December 2013 by Billy Markus and Jackson Palmer, it predates Ethereum. They wanted a fun blockchain, light-hearted project to work on.
Markus created the first instance of Dogecoin by forking open source blockchain luckycoin. Luckycoin was forked from Litecoin. Since Litecoin was a fork of Bitcoin, this makes Doge a great grandcoin of BTC. Coming from the Litecoin branch of the the BTC family tree, Doge doesn’t use SHA-256 like BTC and instead uses Scrypt. It’s consensus algorithm is still proof-of-work (PoW), and can be mined like just like Bitcoin. It just uses a different flavor than its forebearer. Another way it diverges from Bitcoin are its block times. Blocks are generated every one minute on Doge, compared to BTC’s ten.
You may see some sources that say the supply ceiling is 100 billion Doge. This is incorrect. While it started with this cap, the ceiling was removed in early 2014. Since Dogecoin was still subject to basic market dynamics then, the price began to fall. There was less and less incentive for miners to participate in the network and the team started having concerns about a 51% attack.
The solution was to implement merge mining. This would allow people with mining equipment for other Scypt projects to simultaneously mine for both those and Doge. Litecoin was the #2 player in crypto at the time, and since it used Scrypt, it was a clever way to boost the hashing power of the network. Dogecoin lived on.
Other changes besides the removal of the supply cap have come to Doge. The block reward used to be randomized within a range. The top of that range would then halve every 100,000 blocks. This was later changed to be fixed, and ever since block 600,000 on 25 February 2015, the reward for generating a new Dogecoin block has been 10,000. Today, the circulating supply is closing in on 130,000,000,000.
What’s it Worth?
All this magic Internet money is especially ephemeral. We don’t have fully fleshed models to evaluate cryptocurrencies based on earnings, cashflows or other classical measures that we might use for stocks and bonds. The fundamentals we do have are supply and demand.
Let’s recap the basic Dogenomics:
- Current supply: ~130 billion Doge
- No supply cap
- 10,000 new Doge per block
- Block reward fixed in perpetuity
- New block every one minute
- Market Capitalization: ~$15 billion
In a vacuum, these already imply quite a bit for valuation, but currency value is always relative to other currencies, so let’s compare this to Bitcoin:
- Current Supply: ~18.7 million BTC
- Supply cap of 21 million BTC
- 6.25 new BTC per block
- Block rewards halve every 4 years until reaching zero
- New block every 10 minutes on average
- Market Capitalization: ~$1.16 Trillion
Inflation is always and everywhere a monetary phenomenon. - Milton Friedman
I don’t think anybody ever thinks Doge is going to beat out Bitcoin, but take a moment to mull over those six points for Doge and BTC and appreciate why a bitcoin is worth ~$63K and one Doge is worth ~$0.11. For everybody who wants to HODL their Doge to $1, consider that if that happened today, Doge’s market cap would become $135 billion. If that happened and Doge maintained that price, it also means the combined value of all Doge would be going up by $10,000 every minute. This would start putting the valuation of Doge within striking distance of companies like Shopify, Lowe’s, Boeing (which actually could build a moon rocket if they got their watches synced), Shell and Morgan Stanley.
The price of Doge is always going to be less than Bitcoins. The real way to look at Doge is its value relative to Bitcoin. In theory, this should decline over time as the supply of Doge increases and Bitcoin's doesn't. It also seems reasonable to assume there will always be more net demand for Bitcoin. While Bitcoin's supply growth already doesn't keep up with the growth in its demand, there's 10,000 new Doge being birthed every minute while the long term demand for it is speculative at best.
Looking at the chart above, we can see that Doge is at all time highs relative to Bitcoin, excluding the earliest days. While the run-up since the start of th year may have captured some real use value that it was lacking before, is it really that much more valuable, relative to Bitcoin, than it was in December of 2020?
Doge was explicitly designed by its creators to be inflationary. They did this because they wanted it to be cheap, fun and widely available. Considering that it lives in a sector whose entire founding was based on combating the scourge of inflation, it’s difficult to justify these price levels when all of its peers aren’t inflationary.*
With that said, money is being printed at an incredible clip against the backdrop of 0% interest rates. So long as we’re basing the price of Doge in dollars, and the value of the dollar is falling, the real question is which one is losing value the quickest?
How high can Doge go? Can it moon all the way up to $1 per Doge? Maybe. We live in crazy times where animal spirits and populist rage sent a dying retailer from a $300 million market cap to over $20 billion in less than a month. In my opinion, Dogecoin’s intrinsic value is surely less than where it is today and should only go down over time. The whole point of Bitcoin was to deliver a system for sound money based on rules that couldn’t be diluted by the whims of those in charge. Doge isn’t Bitcoin, however, so ultimately, the value of it is whatever the market says it is. Just don’t be caught without a bid when the moon rocket stops.
*** I am not a financial adviser and this is not investment advice, although I was an honor roll student at least once. I own a small amount of Doge, for the lulz & memes, and to give to people for fun. I do not trade it nor intend to trade it for the purpose of making a profit. If you write a limerick about Doge in the comments with your Doge address, I might send you some Doge if it’s good in my own subjective opinion ***
*I know ETH is still inflationary at this moment in time, but proposals being implemented soon will dampen or completely reverse this paradigm. ETH is also a platform with other use cases outside the exchange of transferring value where demand could arguably be said to be outpacing new supply
