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Will Dogecoin Bounce Back? 3 Things to Know

The Motley Fool logo The Motley Fool 6/16/2021 Katie Brockman
a close up of a dog: Will Dogecoin Bounce Back? 3 Things to Know © Provided by The Motley Fool Will Dogecoin Bounce Back? 3 Things to Know

Dogecoin (CRYPTO: DOGE) has experienced a phenomenal run over the past few months. Its price is up by more than 5,500% since the beginning of the year. Over the past 12 months, it has shot up by more than 12,800%.

That type of growth is unmatched by Dogecoin's competitors. Since the beginning of the year, Bitcoin is up by around 37%, and Ether's price has increased by around 250%.

Despite its monumental gains, however, Dogecoin has had a rough month. It has lost nearly half its value in a matter of weeks, with its price sinking by nearly 44% since reaching its peak on May 10.

Volatility is normal in the stock market, and many investments are able to recover from downturns. But we're in uncharted territory with cryptocurrency. Will Dogecoin be able to recover, or is it doomed to collapse? Here are three things you need to know.

a close up of a dog: Shiba Inu dog against a white background © Getty Images Shiba Inu dog against a white background

1. Why Dogecoin surged in the first place

First, it's important to understand what caused Dogecoin to experience such explosive growth. The cryptocurrency has been around since 2013, but it rose to fame only a few months ago. So why the sudden interest from investors?

It's primarily due to retail investors artificially inflating its price to try to make money quickly.

Dogecoin does not have the strongest fundamentals. It has little to no utility right now, and its competitors outshine it in several areas. But it's an inexpensive investment (around $0.31 per token, as of this writing), so it's easy for investors to load up on it and drive up the price. Then once the price has increased substantially, investors can sell their tokens and make a quick buck.

Dogecoin's price increases have also been fueled by celebrities like Elon Musk and Mark Cuban promoting the cryptocurrency online. This has encouraged more investors to jump on the bandwagon, driving up the price even further.

2. Its price surges might not be sustainable

Because Dogecoin's price surges don't align with its fundamentals, it might not see sustainable growth. This doesn't mean that its price won't bounce back. But if it does, it will likely be because retail investors are still trying to inflate its price -- not because it is a strong investment.

For that reason, Dogecoin will still likely experience extreme volatility no matter what happens. If retail investors continue to buy the cryptocurrency, its price could climb. But as soon as those investors decide to move on to a different stock and dump Dogecoin, its price will likely plummet instantly.

This makes it an incredibly risky investment. All investments are unpredictable to a certain extent, but Dogecoin is especially erratic. Whether its price bounces back or not depends on how retail investors feel about it, and that has little to do with its strength as a cryptocurrency.

3. It needs a competitive edge to stick around

There are other cryptocurrencies out there that are much stronger than Dogecoin. Bitcoin, for example, has more name recognition and is more widely accepted by merchants, while Ethereum's open-source blockchain technology creates a variety of uses for the cryptocurrency.

Dogecoin, on the other hand, has little in the way of a competitive advantage in the industry. This means that if nothing changes, it will have a tough time staying competitive over the long run. Once retail investors move on to a different investment, it will need some sort of edge to stay in the game.

Nobody knows what's in store for Dogecoin, and there is a chance it could improve its technology and become a major player in the crypto space. Right now, though, it's not the strongest investment, and it will need to work hard to catch up to its competitors.

If you're considering investing in Dogecoin, make sure you understand the risks involved. While it's possible to make money with this investment, it can be very dangerous, too. Its future is uncertain right now, so tread lightly if you go down this route.

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Katie Brockman has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Bitcoin. The Motley Fool has a disclosure policy.

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