The meme coin surpasses the world’s leading cryptocurrency.
BitcoinIt is (BTC -1.28%) the price has more than doubled over the past 12 months and is approaching its all-time high. The approval of its first cash exchange-traded funds (ETFs) in January, its halving in April, two interest rate cuts and Trump’s election victory brought back a rush of bulls.
But Dogecoin (DOGE -1.45%) — which was originally created in 2013 as a parody of Bitcoin and named after a Shiba Inu dog — has more than quadrupled in the past 12 months. In the past, the price of Dogecoin was often determined by Elon Musk’s unpredictable tweets about the cryptocurrency. He even made Dogecoin acceptable for payment at his car company, Tesla, for certain purchases in 2022.
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Dogecoin’s latest rally was mainly fueled by Trump’s election victory. The rally intensified after Trump announced he would nominate Elon Musk and Vivek Ramaswamy to head the Department of Government Efficiency (DOGE) planned to eliminate wasteful government spending. This news – along with Trump’s pro-crypto stance – helped Dogecoin outperform Bitcoin. So should investors buy this smaller product coin instead of Bitcoin today?
The Similarities and Differences Between Dogecoin and Bitcoin
Dogecoin was created from open source code for Litecoinanother token that had previously been forked or separated from the Bitcoin blockchain. Just like Bitcoin and Litecoin, Dogecoin tokens were mined with energy-intensive proof of work (PoW) consensus mechanism. But to differentiate itself from other PoW tokens, Dogecoin developers launched a new hashing algorithm called Scrypt, which consumed less power and processed transactions faster.
The upgrade caught the attention of online supporters, who dubbed themselves the “Doge Army,” as well as high-profile investors like Musk, Mark Cuban, Snoop Dogg, Kevin Jonas and Gene Simmons. As a result, Dogecoin price surged to an all-time high of $0.73 on May 8, 2021, representing a gain of 47,279% from its first trading price of $0.001540753 on January 23 2014. This rally would have transformed an investment of $10,000. in 4.7 million dollars.
Dogecoin has glaring weaknesses
But today, that same investment would be worth about $2.4 million. Two major challenges have prevented Dogecoin from becoming the next Bitcoin or Ethereum. First, Dogecoin is an inflationary token that has no supply cap. There are 150 billion Dogecoins in circulation as of this writing, and this supply is increasing by approximately 10,000 tokens per minute. Bitcoin has a maximum supply of 21 million tokens, and 19.8 million of those tokens have already been mined. This scarcity makes Bitcoin more similar to gold and other physical assets than Dogecoin.
Second, Dogecoin does not natively support smart contracts, which are used to develop decentralized applications (dApps), non-fungible tokens (NFT), and other crypto assets. Proof of participation (Point of sale) blockchains like Ethereum support smart contracts, so they are often valued based on the popularity and size of their developer ecosystems. PoS tokens can also be “staked” (locked) on the blockchain to earn interest-type rewards. By comparison, Shiba Inuwhich was created as a Dogecoin parody in 2020, is an Ethereum-based PoS token that supports staking and smart contracts.
Simply put, Dogecoin’s blockchain is faster than Bitcoin’s, but its inflationary nature will prevent it from becoming as scarce as Bitcoin. Its lack of support for smart contracts also limits its appeal to developers, who would choose Ethereum or other PoS blockchains to develop their applications and tokens.
Why Dogecoin is not a great alternative to Bitcoin
Dogecoin may be in the spotlight right now, but it’s still trading well below its all-time high because it hasn’t solved its most pressing problems. Once the current news cycle calms down, he will likely give up much of his post-election gains.
Meanwhile, Bitcoin is expected to have more staying power as it becomes the equivalent of digital gold for many investors. Its scheduled halvings, which halve mining rewards every four years, should continually tighten its supply and support its value.
More institutional investors could buy Bitcoin and more inflation-plagued countries could adopt the token as their national currency. Therefore, Bitcoin may not be as exciting or newsworthy as Dogecoin, but it will likely be a better long-term investment for most investors.
Leo Sun has no position in any of the stocks mentioned. The Motley Fool holds positions and recommends Bitcoin, Ethereum and Tesla. The Motley Fool has a disclosure policy.