In the early 18th Century, an Englishman started a joint venture with the Crown to help reduce the national debt. He would sell shares in the South Sea Company, which was given the same monopoly in the Caribbean/South America as the East India Company had in Asia. With the support of the powers of England, the general public bought in, in a huge way. The stock price soared and some early investors became rich overnight. The only problem? The British were at were with the Spanish and Portuguese, who controlled all of South America and a large swatch of the Caribbean. They couldn’t do any business. But how does this weird English quirk compare to everyone’s favorite altcoin, Dogecoin?
The Birth of Dogecoin
Dogecoin was created as a joke. The creator thought it would be funny to have a cryptocurrency named based on a popular meme. To make sure people knew it was a joke, he made it a really bad store of value. To explain this better, let’s look at Bitcoin. There is a finite number of Bitcoin that can ever be mined, and it is very difficult to mine. This means that it has low inflation, making it a good store of value, in theory. Doge, in contrast, does not have these features in place. Five billion new Dogecoins are released every year, and they’re way easier to mine than Bitcoin. This was a deliberate choice to create rampant inflation in the coin, cementing it as an elaborate joke. But, despite it all, it started to rise in price.
Doge to the Moon
Because Doge is a popular meme, people started buying up the cryptocurrency. Some did for the fun of owning something related to the meme, and others bought it speculating that the price would go up in the future. And like I mentioned before, it did! As the price rose, more people took notice. This was helped by Elon Musk, whose tweet about Doge sent the price “to the moon.” It increased from a cent and topped out around 75 cents. One guy put all his life savings and bought Dogecoin on margin. When the price of Doge reached its zenith, he was sitting on over $2 million. As he made the rounds on the media circuit, he proudly proclaimed that he had no plans to sell.
The South Sea Company Crashes to Earth
If you couldn’t tell from my earlier descriptions, the South Sea Company did not have good fundamentals. They needed the stock price to keep increasing in order to turn a profit. So they did the reasonable thing and used to proceeds from selling shares to give out loans to people to buy shares. This kept the price rising, but now they held risky loans tied to their business. Folks that got in early and saw that the company was unsustainable started to sell off their shares, making a nice profit. But this caused the stock price to decline. In response, the founder of the company released a new offering of stock, at an all time high price. People were hearing about the huge profits that people who bought in early had made. The hype this created allowed the company to sell all the new shares. These new investors would be left holding the bag, as the stock price dropped 85% in the next three weeks. Many investors lost everything. And this whole saga happened without the company selling a single product in the South Seas.
How Does This Relate to Doge?
The saga of the South Sea Company shows the danger of investing in something based on hype alone. Throughout its rise and subsequent crash, the South Sea Company didn’t sell anything in Latin America. All of the stock price increase was due to speculation. Likewise, buying Dogecoin is also speculation. When you buy Doge, you’re hoping that you can sell it to someone else at a later date at a higher price. Could it actually be worth something someday if it’s widely adopted as a currency? Sure, it’s possible. But for Doge to be worth $10 with the current number of coins, it would have a market cap of $1.2 trillion dollars. Is it reasonable to expect Doge to be worth the entire GDP of Mexico? And this isn’t factoring in the 5 billion new coins coming into circulation every single year.
Final Thoughts
I started writing this post a week ago, when Dogecoin was worth 50 cents per coin. Now, because China has unequivocally rejected cryptocurrencies, the entire crypto market has crashed. Doge is now worth 29 cents. The Dogecoin millionaire with $2 million worth of Dogecoin? Those coins are now worth a third of what they were at its height. It highlights the danger of the crypto market. It is very sensitive to outside forces. Pump and dump schemes are rampant. Tweets cause wild fluxuations in price. And future, potentially imminent government regulation of the crypto space will play a huge role in the immediate future of the market. As a concept, I think cryptocurrencies will have a revolutionary effect in the near future. But I certainly don’t think it will be Doge. I don’t pretend to be an expert, so take my personal opinions with a grain of salt. Do your own research and come to your own conclusions.
If you’d like to learn more about the South Sea Company and it’s wild journey, I highly recommend this short series of YouTube videos.