Dogecoin, a cryptocurrency which began as a joke and is touted as Elon Musk’s favourite cryptocurrency, hit its lowest level since early April yesterday, in line with a wider sell-off in cryptocurrency markets.
What’s the cause this time around? Last Friday, in the latest move in China’s war against cryptocurrencies, Sichuan’s provincial government ordered 26 of the largest cryptocurrency mines to stop operating until authorities conclude an investigation.
Chinese authorities had already sprung a nasty surprise on investors last month when they said digital currencies shouldn’t be used as payment and banned financial institutions from providing crypto services. They also clamped down on bitcoin mining in the country, the process by which new units of digital currencies are created and the blockchain technology is maintained.
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More than 65% of cryptocurrency mining takes place in China.
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What has all of this got to do with dogecoin?
Dogecoin was created in 2013 by software engineers Jackson Palmer and Billy Markus. It is based on the popular internet “meme” of a Japanese type of dog, the Shiba Inu.
It began as a parody, but even after Tuesday’s decline it boasts a market cap just shy of $24bn, higher than most other legitimate cryptocurrency projects.
You may be wondering why dogecoin has tanked so much more than other cryptocurrencies given it is just a meme crypto after all. The answer is simple, I suspect it has to do with dogecoin being “high beta”.
When other cryptocurrencies soar in value, dogecoin has a tendency to go to the moon. When other cryptocurrencies fall, however, it falls even harder.
That is exactly what happened this week. China’s latest crackdown sent several popular cryptocurrencies such as bitcoin and ether tumbling – at one pont, bitcoin fell below the $30,000 mark, effectively erasing almost all of its 2021 gains.
Dogecoin’s turbulent few months
Speculators who bought into dogecoin in recent months have faced a wild ride, partly because of its hypersensitivity to market news and a spate of bullish tweets from Elon Musk, who is known in many circles as the “Fed” of the crypto world. It is up by almost 4000% since the start of the year.
Doge has quickly gained recognition to be known as Musk’s favourite. The listing of dogecoin on Coinbase Pro, last month also lent the joke cryptocurrency some legitimacy (dogecoin was already listed on Coinbase, but not on Coinbase Pro).
What should crypto-investors do now?
With all that in mind, where does that leave dogecoin? Given its volatile nature, is this a classic case of a daily slump which corrects itself later?
The problem with dogecoin is that, like all cryptocurrencies, it has no fundamental use or value to the point that even the project’s own co-founder Markus said earlier this year the cryptocurrency is a good “barometer” for how distorted the digital currency is from reality.
So even if Musk does tweet in favour of doge, it is more likely that speculators have finally woken up and realised it isn’t serious, something which shouldn’t have come as a surprise in the first place.
As for the wider crypto market, the impact of China’s latest crackdown is less certain.
Some industry experts fear that the crackdown may merely prompt cryptocurrency miners to relocate outside of China. So if that happens, the effect on the market may be more muted. But if China’s regulatory actions really do slow down the pace of crypto activity, then investors will likely feel a greater pinch.
Either way, keep watching the space but treat it as a highly speculative asset.
