Doc's Daily Commentary
Mind Of Mav
Is DOGE The Precursor To The Next Bull Run?
It’s been a wild week in the stock market thanks largely to the asset that people cannot stop talking about: Gamestop (GME). The heavily documented story of GME has inspired visions of a new frontier where people regain control of financial markets at the far-too-satisfying chagrin of the large institutions.
And with these imaginations comes a new question that’s on everyone’s minds: What’s the next step?
For some people, it’s Dogecoin (DOGE).
Many people have looked to another financial asset to carry on the ‘movement’ that began with GME. And for many, it comes in the form of a cryptocurrency based on the popular meme of a smiling Shiba Inu.
The rush has been frenetic. Within 24 hours the price of DOGE rose 800%, drawing comparisons to the sudden growth of GME that grabbed the attention of the entire world.
Individuals who currently own DOGE can roughly be put into two categories: The first are those who are throwing a bit of spare change at the coin out of pure humor, maybe to get a laugh on their social media. The second are those who believe DOGE is GME 2.0: Decentralized Edition and a brand new rocket ship fueled by memes that they can get in on early this time. One that can’t be manipulated by the traditional stock trading elite. And this latter group heavily outweighs the former.
But it is my belief that the millions of people who believe DOGE can be “pumped” in a similar fashion to GME not only misunderstand Dogecoin and cryptocurrencies in general, but also fundamentally misunderstand the GME short squeeze and the role that Reddit’s /r/wallstreetbets played in it.
A skim through of social media posts and article summaries will give one a general idea that the GME phenomenon is a case of ‘the people coming together and collectively deciding to drive up the price of a stock.’ Some may take that information and believe that any asset, chosen by the people, can be pumped up to an extraordinary price, so long as enough people are on board and on the same page.
What you might think
Many people understand that GME was a stagnating stock. Traditional investors were low on the brick-and-mortar retailer and many were betting that it would fold. Then, as the story goes, the folks from /r/wallstreetbets came in and decided they were going to take the once doomed stock and continue to purchase it until the price reached extraordinary heights. Some may interpret this as the people’s power to pick any asset, no matter how bad it is, and pump it in the face of the establishment while laughing to the bank at the bewilderment of institutional investors. This belief misses the crucial detail that GME was targeted specifically because it was slowly revealed by sleuthy analysts over the course of years that large funds who were betting on the stock crashing were taking out enormous short positions against the stock that would eventually exceed the number of shares outstanding.
GME isn’t a case of “Redditors meme’ing a dead stock to skyrocket the price.” It’s a case of a small group of Redditor’s doing research into the short positions of large investors and revealing to a wider but still relatively small group of /r/wallstreetbets users that there might be something fishy afloat that can be taken advantage of many months down the line.
Here‘s what you need to know about the GME short squeeze:
1-GME’s dramatic price explosion is due to a market phenomenon called a short squeeze, not due to a “price pump.”
2-The bull run that Reddit’s /r/wallstreetbets users engaged in only needed to raise the price of GME above the price that shorters bought the stock at. It was also a very disjointed and gradual process with no clear consensus whether or not it would materialize into anything.
3-The stock was specifically chosen to be pumped because a few on-the-ball analysts predicted correctly that various investment funds had taken out exceedingly large short positions on GME.
4-The reason many GME buyers were/are certain the price would increase simply by everyone holding the stock is that it was known that institutional investors who had shorted the stock would eventually need to repurchase it at the going price in order to pay back the people who lent them the stock in the first place. These institutional investors (NOT the Redditors) purchasing the stock at the market price would lead a jump in price, referred to as a short squeeze.
Here’s why DOGE is completely different:
1-There are no such short positions taken out against DOGE. There will be no short squeeze for Dogecoin because there are no investors that have borrowed DOGE that will need to repurchase it at the going price.
2-DOGE’s price will follow market forces and will only increase in price if there are people willing to buy more at a higher price. Almost all of these people buying at higher prices will be everyday retail investors. If no one sells and no one buys, the price doesn’t move. Simple as that.
3-Dogecoin has an unlimited supply. Unlike shares in a company or other cryptocurrencies like Bitcoin, there is no set limit to how much DOGE can be mined and owned by individuals. This means even in the hypothetical situation that some institution fell into the same trap that the hedge funds who over-shorted GME did and ended up in a position where they owed overpriced Dogecoins to their lenders, they have the option to simply mine more DOGE to pay back their debts instead of being forced to buy it from the market.
4-DOGE’s most recent price jump is a demand-driven spike plain and simple. And hype-driven spikes are a dime-a-dozen during any crypto bull season. And while many people have indeed gotten rich from crypto pumps, far more have lost.
5-Price jumps driven purely by demand can only go so far without the involvement of other market forces.
But although hype-driven demand spikes are a dime-a-dozen in crypto, this is not to say that DOGE can’t be different from all the countless pump-and-dumps of the past. Absolutely no one can say for certain that this time around will be the same. But what should be known, and what could be said for certain, is that the same forces that spiked GME’s price (and may continue to spike it in the future) simply do not exist in the world of crypto currently and cannot be applied to DOGE. GME’s dramatic price explosion was not caused because Redditors decided to buy and hold the stock. That certainly contributed to a significant, but relatively mild increase in the price. The spike in a short squeeze is caused, not by populist demand, but rather by the small, steady price increase hitting a critical point at which institutional shorters are forced to cut their losses and purchase stock at the market price. It is not the buyers from /r/wallstreetbets that surged the price of GME, it is the institutional investors who would be doing that.
So where does this leave us?
Thousands, if not millions of people still currently hold varying quantities of DOGE. To these people, even an explanation as to why DOGE will be very different from GME may seem sacrilegious. What should be emphasized, as always, is to understand the history and risks involved with cryptocurrency investments and to try to take some time to understand the fundamentals of the technology and the particular coins that you are invested in or interested in investing in.
And to that end, I will sign off with some facts. Unlike GME, the price of DOGE will not increase simply by everyone holding it. There are no institutions that are required to purchase DOGE at the market price. Dogecoin must be continued to be bought at a higher price if its price is to increase, and the overwhelming majority of buyers will be retail investors, regular people. The kind of hype-driven price explosion that DOGE has experienced in the past couple of days has been seen countless times in crypto and this is not at all the most dramatic one that we have seen.
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