Why You Should Avoid The Dogecoin Hysteria

Undeniably, one of the biggest catalysts for Bitcoin and the cryptocurrency complex is the ability to invest outside the traditional financial architecture. As digital and decentralized assets, crypto coins operate purely on free market principles. So long as demand exists, prices will rise. If not, they tumble — and there’s no plunge protection team to mitigate the pain.

For many, taking away the training wheels is a small price to pay, particularly because it’s no price at all. As the meme stock phenomenon demonstrated, such protections only benefit the Wall Street elites. The concept of free markets in the traditional equities sector is an illusion. In the end, the house always has an advantage.

Democratization of Investing Is Universally Appealing

But with Bitcoin, it’s not entirely clear who has an advantage, if anyone. For instance, a major reason why retail investors are at a disadvantage in the stock market is its scheduling. Take the New York Stock Exchange. It’s open from 9:30am to 4:00pm eastern time, which cuts right into the average person’s weekly work hours. Moreover, if you live on the west coast, this time frame is incredibly inconvenient.

Factor in the afterhours and premarket sessions and you have ample opportunities for professional traders to bamboozle the average Joe. However, with Bitcoin and other cryptocurrencies, the fact that they trade 24/7/365 across the globe discourages scheduling-based shenanigans, precisely because even the scheduling dynamics of crypto are utterly decentralized.

This gives the aura that virtual currencies represent an entirely new paradigm shift in the investment markets — and to a large extent, that’s completely true. Digital assets’ core ethos of decentralization prevents access-based manipulation. That is, the stock market is rife with corruption both overt and subtle because it’s relatively easy to deny regular investors the channels that the big boys deploy.

With cryptocurrencies, the rules are the same for everyone. In part, this means an event that occurs halfway across the world could devastate portfolios both big and small. Elites hate this lack of control, which is why they probably were so slow to embrace virtual currencies.

Essentially, the crypto market is the first truly democratized investment market, where retail players and billion-dollar hedge funds trade on equal footing. But does that mean every cryptocurrency — particularly dubious ones like Dogecoin — has the potential to deliver sustained profitability?

If you’re thinking about gambling on DOGE, you may want to consider its distinctly high risks before proceeding.

Dogecoin on the Precipice of Potentially Big Losses

While cryptocurrencies including Dogecoin represent a fresh way forward in terms of market access, fairness and participation, this doesn’t necessarily guarantee that digital assets will trade any differently than stocks over the long run.

As I mentioned, some of the manipulative actions go away because of the constant 24/7 trading. Ultimately, though, human psychology determines where an asset — whether centralized or decentralized — ends up. Democratization has no bearing on one’s tolerance for risk. At a certain point, an asset cannot move higher because the collective human psychology is unable to bear the risk any further.

This is exactly what I’m seeing with Dogecoin and its technical chart. Since approximately mid-April of this year, DOGE has charted what appears to be a classic head-and-shoulders pattern (HS), which as you may know has bearish implications. In the discipline of technical analysis, the HS is regarded as one of the most reliably accurate patterns.

Dogecoin Hysteria

What I also found interesting was the description of the HS pattern according to author Steven B. Achelis. In his book, “Technical Analysis From A To Z,” Achelis states the following:

During a healthy uptrend, volume should increase during each rally. A sign that the trend is weakening occurs when the volume accompanying rallies is less than the volume accompanying the preceding rally. In a typical Head-and-Shoulders pattern, volume deceases on the head and is especially light on the right shoulder.

That’s exactly what we’re seeing with Dogecoin. Not only does the visual representation of its price action look alarmingly like an HS pattern, the volume trend aligns with the pattern’s classical definition.

Adding fuel to the fire, Achelis’ book was printed (second printing) in 1995, which of course predates cryptocurrencies by several years. Yet it doesn’t matter that Dogecoin and other cryptos are new investment classes. Again, humans do the bidding — and that means human psychology is the final arbiter of a publicly traded asset’s trajectory.

If You Must Trade DOGE, Do So as Speculation

Obviously, the beauty of the markets is that anything can happen. Investment analyses don’t make guarantees but rather attempt to assess probabilities. I’m not suggesting that Dogecoin’s failure is inevitable. Instead, my argument is that it’s more likely than not that DOGE will experience a sharp correction based on tried-and-true analytical methodologies.

And that’s really the point about Dogecoin or any other cryptocurrency. Recently, some folks have suggested that despite DOGE starting off as a joke, the underlying blockchain offers practical utility. The same is said about other assets, particularly Ethereum.

However, a coin or token’s underlying practicality — or lack thereof — generally bears little correlation to its upside potential. Most people who buy cryptocurrencies are not doing so to develop distributed intelligent platforms of their own. Rather, they want to make money. Getting the two confused can lead to much heartache.

I suppose the beauty of Dogecoin is that arguably most people regard it as having little utility. Instead, they merely trade it on the greater fool theory. I think this is critical. You should trade cryptos not because of their underlying blockchain applications but because demand for the coins/tokens exists.

But remember, once that demand fades, it’s time to get out. This might be the other lesson of Dogecoin that sadly millions may learn too late.

Disclosure: The author is long the cryptocurrencies mentioned above.

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