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Why Dogecoin Is a Pyramid Scheme

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There’s been lots of public debate in recent months about Dogecoin (CCC:DOGE-USD). Is Dogecoin a currency or a security? Is it a good investment or a bad investment? Does Dogecoin seriously compete with Bitcoin (CCC:BTC-USD), or is it just a social media meme?

Dogecoin Cryptocurrency

Source: Orpheus FX / Shutterstock.com

Today, I’d like to take a look at another important question. Is Dogecoin little more than a classic pyramid scheme?

What Is a Pyramid Scheme?

I’ll start out by defining a pyramid scheme and discussing some of its common traits. A pyramid scheme is an investment model that revolves around early participants recruiting new participants. The funds from the new participants are then used to generate returns for the early participants. To make money on the scheme, a participant needs more investors to join the scheme after they buy in.

Pyramid schemes often involve products or investments that have little or no value. New investors are typically recruited by participants touting the huge returns of the early investors. In truth, the early investors in a pyramid scheme do make a ton of money.

But it’s a zero-sum game, and that money comes straight out of the pockets of later investors. And of course, the pyramid scheme model is ultimately unsustainable. There is not an unlimited number of new investors to recruit to continue to generate returns for the earlier investors.

Pyramid scheme participants often promise unrealistically high returns that should seem too good to be true. Participants frequently project returns that are far beyond the roughly 8% to 15% historical annual returns of the S&P 500.

Dogecoin As a Pyramid Scheme

Dogecoin does not generate cash flow. It doesn’t pay interest or a dividend. It has no unique utility compared to other top cryptocurrencies. The way to make money in Dogecoin is to buy in and then immediately start shilling for its price to rise by posting memes on social media and telling friends, relatives and passers by that it’s going to the moon.

The only way the price of Dogecoin goes higher over time is if more people or institutions buy in. Early Dogecoin investors have already made a killing. It’s price is up more than 13,300% in the past year alone. But if the Dogecoin community doesn’t keep recruiting more buyers, the price will stagnate or drop lower.

A share of stock represents fractional ownership of a company. In theory, that company will grow and evolve over time, and that fractional ownership stake will rise in value. But Dogecoin isn’t growing or creating any value no matter how long you wait. Even long-term Dogecoin investors need more buyers to join in to drive the price higher.

Dogecoin Creator’s Take

Dogecoin creator Billy Markus has openly acknowledged that he created the cryptocurrency in about two hours as a joke.

Markus also recently said Dogecoin and the rest of the cryptocurrency market is driven almost entirely by the greater fool theory. The greater fool theory is the idea that only fools are buying a particular investment, but they are doing it with the hope that even more foolish people will eventually buy the investment back from them at a higher price.

“I agree with the greater fool theory driving most of crypto prices, but I’m honestly wondering what percent you think any crypto is purchased from utility vs greater fool theory,” Markus tweeted. “From my viewpoint, it’s about 99.99% greater fool theory.”

How to Play It

The good news for Dogecoin investors is that plenty of people throughout history have gotten rich off pyramid schemes. The key is to be an early investor. Anyone who invested even a moderate amount of money in Dogecoin one year ago and held on to today is likely already rich.

There is only one question that matters for Dogecoin investors today. Are we still in the early stages of the Dogecoin pyramid scheme, or are we in the late stages? To me, the answer to that question will depend on whether or not companies ever buy Dogecoin to hold on their balance sheets the same way companies like Tesla (NASDAQ:TSLA) have bought Bitcoin to diversify their balance sheets. Personally, I believe they will not.

I have a difficult time seeing enough additional retail investor demand to drive Dogecoin prices much higher from their current levels. Without companies buying Dogecoin, I think new Dogecoin investors are too late to profit off the pyramid scheme. However, if Dogecoin becomes a common balance sheet holding of Fortune 500 companies, today’s buyers could still be getting in early enough to make a killing.

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On the date of publication, Wayne Duggan did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Wayne Duggan has been a U.S. News & World Report Investing contributor since 2016 and is a staff writer at Benzinga, where he has written more than 7,000 articles. Mr. Duggan is the author of the book “Beating Wall Street With Common Sense,” which focuses on investing psychology and practical strategies to outperform the stock market. 

The post Why Dogecoin Is a Pyramid Scheme appeared first on InvestorPlace.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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