Ever heard of Dogecoin? It’s a cryptocurrency that was created by two software engineers as a joke to make fun of the wild speculation of cryptocurrency. This year, it is up 1,493% and that is after falling 33% in value since 08 May. At that point is was up a staggering 2,236% from the start of the year. As it is tradable, people have become incredibly rich off it, like Glauber Contessoto. He invested €250,000 in Dogecoin after reading about it on Reddit and saw his investment rise to $3 million before falling back down to $1.5 million. For someone earning $60,000 a year, we are talking about amounts that would take a lifetime to earn. But he’s not sell and is “HODLing”. It is likely that if he maintains his holding for too long, not only will he lose the millions that he made but he will also lose his original $250,000.
Message boards on Reddit and other sites have been creating a momentum for companies that have absolutely no bearing on the fundamentals of the actual company. Last year we saw the share price of bankrupt car company Hertz rise 365% in 5 days. Then of course we had the short squeeze on Gamestop in January this year, when the stock price rose from $3.25 to $347.51 (currently trading at $172.00. And now we have Dodgecoin and to an extent Bitcoin.
This isn’t helped by the likes of Elon Musk making announcements about Tesla taking payment in Bitcoin and then taking it away again. He is able to manipulate markets with a tweet and must be close to being investigated by the SEC. It’s one thing for a multi billionaire to lose some money on one of his investments, it is completely different when all of your wealth is in one of these highly speculative assets.
Large investment banks have been gaming the market for years so why can’t the small investor do it too? The thing is, investment banks and fund managers have sell points when they will take profit off the table. Investors like Glauber Contessoto do not seem to know when that time is. He had $3 million at one stage and even after it halved in value, he isn’t selling. He will probably never have this amount of money again but he’s not taking it when he has the chance.
As with all investments, risk and return are related, so if you have an investment that went up over 2,000% in 5 months, it can very easily go to zero. And if the asset was set up as a joke and has no intrinsic value, it is very likely that it will at some stage.
It can be hard to see people making such big returns from their investment. “If only I’d put €2,000 into Doge, we’d have had €44,720 and we could have put a deposit down on a house…or we could have put €20,000 down and just bought the house with no mortgage.” But remember that all the big gains made are because they need others to jump on the bandwagon and drive the price up higher. You have already missed the initial big gains that have been made. And sooner or later, the fundamentals of investment will take control and an asset will no value will have the correct price, $0.
Investing is a long term game and it takes years to make big gains. Yes, some years the gains will be big and others they will be negative, but you know that the longer that you hold the asset, the greater the chance that you will make a gain. With the like of Dogecoin, Gamestop and the stock de jeur, the longer you hold the asset, the greater the chance that you will lose your money. That my friend is what gambling is.
Steven Barrett
24 May 2021