The meme coin is outperforming the world’s top cryptocurrency.
Bitcoin‘s (BTC -0.43%) price has more than doubled during the past 12 months and is hovering near its all-time high. The approvals of its first spot price exchange-traded funds (ETFs) in January, its halving in April, two interest rate cuts, and Trump’s election victory brought back a stampede of bulls.
But Dogecoin (DOGE -1.05%) — which was originally created in 2013 as a parody of Bitcoin and named after a Shiba Inu dog — more than quadrupled during the past 12 months. In the past, Dogecoin’s price was often driven 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.
Image source: Getty Images.
Dogecoin’s latest rally was mainly fueled by Trump’s election victory. The rally amped up after Trump said he would appoint Elon Musk and Vivek Ramaswamy to lead the planned Department of Government Efficiency (DOGE) to root out wasteful government spending. That news — along with Trump’s pro-crypto stance — helped Dogecoin outperform Bitcoin. So should investors buy this smaller meme coin instead of Bitcoin today?
The similarities and differences between Dogecoin and Bitcoin
Dogecoin was created from the open source code for Litecoin, another token that was previously forked, or split off, from Bitcoin’s blockchain. Just like Bitcoin and Litecoin, Dogecoin’s tokens were mined with the energy-intensive proof-of-work (PoW) consensus mechanism. But to differentiate itself from other PoW tokens, Dogecoin’s developers launched a new hashing algorithm called Scrypt, which consumed less power and processed transactions at a faster rate.
That upgrade attracted 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’s price soared to an all-time high of $0.73 on May 8, 2021 — which represented a 47,279% gain from its earliest trading price of $0.001540753 on Jan. 23, 2014. That rally would have turned a $10,000 investment into $4.7 million.
Dogecoin has some glaring weaknesses
But today, that same investment would be worth about $2.4 million. Two major challenges prevented Dogecoin from becoming the next Bitcoin or Ethereum. First, Dogecoin is an inflationary token that doesn’t have a supply cap. There are 150 billion Dogecoins in circulation as of this writing, and that supply is growing by about 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. That scarcity makes Bitcoin more similar to gold and other physical assets than Dogecoin.
Second, Dogecoin doesn’t natively support smart contracts, which are used to develop decentralized apps (dApps), non-fungible tokens (NFTs), and other crypto assets. Proof-of-stake (PoS) blockchains like Ethereum support smart contracts, so they’re often valued by the popularity and size of their developer ecosystems. PoS tokens can also be “staked” (locked up) on the blockchain to earn interest-like rewards. By comparison, Shiba Inu, which was created as a parody of Dogecoin 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 among developers, who would choose Ethereum or other PoS blockchains to develop their apps and tokens.
Why Dogecoin isn’t a great alternative to Bitcoin
Dogecoin might be in the spotlight right now, but it’s still trading far below its all-time high because it hasn’t resolved its most pressing issues. After the current news cycle cools, it will probably give up a lot of its post-election gains.
Meanwhile, Bitcoin should have more staying power as it becomes the equivalent of digital gold for many investors. Its scheduled halvings, which reduce the rewards for mining in half every four years, should consistently tighten up its supply and buoy its value.
More institutional investors could buy Bitcoin, and more inflation-wracked countries could adopt the token as a national currency. Therefore, Bitcoin might not be as exciting or meme-worthy as Dogecoin, but it will probably be a better long-term investment for most investors.
Leo Sun has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bitcoin, Ethereum, and Tesla. The Motley Fool has a disclosure policy.
