Dogecoin (CRYPTO:DOGE) investors have been on a wild ride this year. Between January and May, its price skyrocketed over 15,000% to a little over $0.74, only to lose more than half of its value just weeks later. But as of this writing, Dogecoin is still up about 6,700% year to date, and the price has been climbing consistently over the past month.
Investors may see this as an opportunity — perhaps the Shiba Inu is finally back on track to reach the moon! But before you make any decisions, it’s important to consider the risks and weigh all of your options. For instance, there are ways to get Dogecoin exposure in your portfolio without actually buying any cryptocurrency. Let’s dive in.
Image source: Getty Images.
The downside of Dogecoin
Dogecoin started as a joke, but it has garnered a substantial following on social platforms like Reddit and TikTok. In fact, earlier this year, Dogecoin surpassed Bitcoin to become the most mentioned cryptocurrency on Twitter. And of course, Elon Musk added fuel to that fire with a series of amusing tweets mentioning Dogecoin.
But here’s the problem: Dogecoin’s value is based solely on its popularity, and popularity is fickle. The tide can quite literally turn overnight, and that’s exactly what happened in May. More to the point, despite a huge social following, Dogecoin is still worth a fraction of Bitcoin’s total market value, and it doesn’t offer the programmability of other blockchains like Ethereum. In short, nothing significant differentiates Dogecoin from the thousands of other cryptocurrencies that now exist.
There’s also another problem: Dogecoin is difficult to value. Investors use metrics like revenue, earnings, and discounted cash flows to value stocks. But Dogecoin isn’t a cash-generating business, nor is it an interest-generating asset like a bond. For that reason, speculating on Dogecoin’s future price is more akin to gambling.
Of course, that doesn’t mean its price is going to plummet. Someone always wins the lottery, and a year from now, Dogecoin could be worth 10 times what it is today. Or it could be worth less than $0.01, just like it was nine months ago. Regardless, it’s a very risky investment.
Image source: Getty Images.
The benefits of Coinbase
Coinbase (NASDAQ:COIN) helps its clients participate in the cryptoeconomy, the burgeoning ecosystem that includes assets like Bitcoin and Dogecoin, as well as non-fungible tokens (NFTs), smart contracts, and decentralized financial (DeFi) applications.
The company serves 68 million users, including retail investors, institutions, and ecosystem partners. Its platform offers a range of products such as analytics software, developer tools, and mobile wallet services. However, Coinbase is primarily a brokerage, and 85% of its revenue came from transaction fees during the most recent quarter.
Put another way, Coinbase thrives when the crypto market is volatile: Higher trading volume means more transaction fees, and that means more revenue for the company. So, if you’re interested in Dogecoin — or any other cryptocurrency — Coinbase can help you capitalize on that volatility, whether the price is moving up or down.
For instance, consider the company’s financial performance through the first half of 2021. As Dogecoin and the broader crypto market soared in the first quarter, then crashed in the second, Coinbase posted incredible growth on both the top and bottom lines.
|
Metric |
H1 2020 |
H1 2021 |
Change |
|---|---|---|---|
|
Revenue |
$377 million |
$4.03 billion |
969% |
|
Earnings per share |
$0.15 |
$9.60 |
6,300% |
Source: Coinbase SEC Filings. Note: earnings per share is based on diluted share count.
More importantly, Coinbase has differentiated itself from other brokerages through significant investments in cybersecurity and regulatory compliance. In fact, it secures clients’ funds with the largest hot wallet crime program in the insurance market. And the company currently holds $180 billion in assets on its platform, or 11.2% of all existing crypto assets, making it a trusted brand name. As a result, some Wall Street analysts see significant upside for shareholders.
Here’s the bottom line: Coinbase is by no means a risk-free investment. Since its initial public offering in April, the stock has plunged over 30% from its opening price. But I do think it’s less risky than buying Dogecoin outright, simply because Coinbase is a cash-generating business that doesn’t depend on the success of any single cryptocurrency.
That’s why this stock looks like a smart way to get Dogecoin exposure in your portfolio without actually buying any Dogecoin.
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.
