What happened
Popular cryptocurrencies Bitcoin (CRYPTO:BTC) and Ethereum (CRYPTO:ETH) are on the verge of closing out a good week. As of this writing on Thursday afternoon, the cryptocurrencies are up 5.6% and 4.2% respectively since last Friday afternoon, according to data from S&P Global Market Intelligence.
But not all popular cryptocurrencies are up. For its part, Dogecoin (CRYPTO:DOGE) is down 6.5% over this time frame. And perhaps these divergent trends are best explained by why these cryptocurrencies are popular. It’s not the same in each case.
Image source: Getty Images.
So what
Cryptocurrencies are speculative investments, but Dogecoin is perhaps more speculative than most. It was initially created as a joke and it went largely unnoticed for years. Then in 2020, the tokens started rising in value as people on social media theorized what would happen if it ever reached $1 per coin — coins were well below a penny at the time.
The buzz kept getting louder and eventually reached the ears of Tesla founder Elon Musk, who used his social media clout to further bring attention to Dogecoin. During this time, Dogecoin wasn’t necessarily getting adopted in commerce but rather people were speculating on its value.
This isn’t to say that Dogecoin doesn’t have utility — indeed, it can be used for things. For example, AMC Entertainment will soon accept Dogecoin as a payment option. But I believe it’s fair to say people are investing in Dogecoins more than using them, hoping the value will rise.
The problem here is it seems like social media attention has shifted from Dogecoin to Shiba Inu coin — itself a parody of Dogecoin. In fact, it appears Musk has found a new love, sharing memes of Shiba Inu in recent weeks. And now that Coinbase supports trading for Shiba Inu, it’s easier than ever for speculative trading to go to Shiba Inu. For evidence of this shift, consider that trading volume for Shiba Inu coin was more than double that of Dogecoin today, according to CoinMarketCap, even though neither was making headlines.
Three-month returns for Bitcoin, Ethereum, and Dogecoin. Dogecoin Price data by YCharts
Now what
Dogecoin appears to be losing steam as other speculative cryptocurrency investments like Shiba Inu gain prominence. This doesn’t mean that utility won’t increase for Dogecoin in time — it could. And this doesn’t mean traders won’t come back to Dogecoin — they could. It just stands in contrast to cryptocurrencies like Bitcoin and Ethereum, where utility is growing and serving as the catalyst to send tokens higher.
For example, Ethereum is currently transitioning to what some call Ethereum 2.0. This update completely changes how the blockchain works and should make it faster and less energy intensive. This is happening because coins are being used more than ever. The upgrade — officially known as EIP-1559 — should not only make it more useful but it could also send the cryptocurrency’s value to higher levels.
And regarding Bitcoin, like Ethereum, it’s making an upgrade commonly called Taproot. Again, the reason for the upgrade is utility — it needs to be able to process transactions faster and cheaper while requiring less energy. This is because its adoption is growing. El Salvador has adopted it as legal tender and Brazil has signaled it might do the same.
This doesn’t mean that speculation doesn’t drive prices for Ethereum and Bitcoin. For example, Dallas Mavericks owner Mark Cuban recently sent Ethereum higher by suggesting it’s the best cryptocurrency to buy. And this doesn’t mean everyone will adopt these cryptocurrencies. For example, Mexico’s president recently said the country won’t be using Bitcoin like El Salvador.
So Dogecoin can be used. And Bitcoin and Ethereum can likewise be driven higher by speculation. But there appears to be predominant trends at play with each. It looks like Dogecoin is losing some of its luster with traders whereas Bitcoin and Ethereum continue to gain long-term adopters. I believe this explains the divergent prices this week.
Finally, what happened this past week doesn’t really tell us what will happen in the weeks to come. The cryptocurrency space is young and still prone to quick changes. What happened this week could reverse next week.
If you’re interested in cryptocurrencies, I’d suggest you start by researching the ones being increasingly used for real-world applications. Those have the greatest chances of long-term success, in my opinion. Bitcoin and Ethereum are strong candidates in this regard but they’re certainly not the only ones.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
