Bitcoin's Catalyst: Dogecoin Is The Real Threat To The USD
Apr. 20, 2021 1:25 PMBitcoin USD (BTC-USD)DOGE-USD, GBTC
Summary
Valued more than Barclays, Dogecoin is making a mockery of the USD-backed global financial system. It's a joke. Dogecoin reflects the dangerous nihilism of Gen Z.
Dogecoin's 'parody of money' is enough to make bitcoin look like a serious and disruptive financial innovation, galvanizing the view that Bitcoin can become a powerful reserve asset.
The recent sell-off is a measure of 'regulation paranoia' among bitcoin investors. These fears are overblown, particularly in the context of the IMF's laissez-faire views on cryptocurrency.
Photo by Alex Wong/Getty Images News via Getty Images
What is doge?
If you live in a 'free state' and were allowed to visit a bar last weekend, chances are you likely heard someone talking about Dogecoin (DOGE-USD). However, it's unlikely you heard anyone explain what it is or why it is skyrocketing in value.
(Image source: Wikipedia)
Doge was a popular internet meme of the 2010s, featuring a Japanese Shiba Inu dog. Two software engineers (working at Adobe (NASDAQ:ADBE) and IBM) thought it would be funny to create a doge-themed cryptocurrency. After sponsoring the return of the Jamaica National Bobsleigh Team to the 2014 Winter Olympics, supporters of dogecoin went on to successfully sponsor a NASCAR Sprint Cup team. More recently, it received endorsements from Elon Musk.
(Image source: Phil Parsons Racing)
The doge phenomenon may be confusing to readers who are not digital natives, most of whom are probably snickering at the thought of stodgy CPA types reading a serious analysis of dogecoin on Seeking Alpha, then discussing its merits in the comments. Dogecoin has surged 450% in the last week. Why are people so excited about it?
The Federal Reserve on suicide watch...
Dogecoin reflects the dark nihilism of Gen Z, what is seemingly the touchstone of a generation that is paranoid about the future and deeply divided by toxic identity politics.
Gen Zers are smart and they know that their generation might very well be the last generation to live in the world as they know it. This knowledge is not something understood lightly, but with the full force of what it means. They are dealing with the world they have been born into as if it is inherently meaningless and chaotic and have responded with pure absurdism.
-William Mercado
Like any good internet meme, dogecoin is a phenomenon that people want to be a part of. The more people who become involved in circulating the meme, the funnier it becomes (see this example). In the era of the $69M jpeg file and $100,000 CryptoKitties, dogecoin is more collective performance art than financial innovation. Unlike interesting new projects such as ChainLink (LINK-USD), dogecoin does not feature any new software breakthroughs, nor has it attracted the strong developer and mining community that supports bitcoin.
(Image source: Reddit)
To be sure, dogecoin is little more than an internet joke, which is why you can't trade it on the Winklevoss-backed Gemini. This precisely the point. An entire generation of investors is speculating on their own meme currency, which is essentially a parody of money. Behind dogecoin is a rebelliously nihilistic and perhaps dangerous idea that meme money is no more real than actual currency. It may be a joke, but it's a powerful one.
...because the FinTech revolution questions the two forms of money that we just discussed, coins and commercial bank deposit. And it questions the role of the state in providing money.
We are at a historic turning point. You--young or not so young--doesn't matter. But bold entrepreneurs gathered here today, You are not just inventing new services. You are reinventing the history of money. You drawing a completely new future actually, and we are all in the process of adapting.
A new wind is blowing and it is that of digitalization... ...and this is key: Money itself is changing. We expect it to become more convenient, more user friendly. Perhaps even less serious-looking. We expect it to be integrated with social media, readily available for online. And person-to-person use including micro payments. And of course we expect it to be cheap, safe, protected against criminals and prying eyes.
So what role will remain for cash in this digital world... ...even cryptocurrencies such as bitcoin, etheruem, and ripple are vying for a spot in the cashless world, constantly reinventing themselves in the hope of offering more stable value and quicker and cheaper settlement.
-Christine Lagarde, Managing Director of the IMF, 11/25/2018
Every buyer of dogecoin is (perhaps unwittingly) making a statement about the legitimacy of the Bretton Woods world order, something we have discussed at length previously. The zoomer generation is having a good laugh while exploring the intersection of central banking and technological disruption.
In the long run, this phenomenon may convert to attitudes and beliefs that are very supportive of the idealism behind bitcoin, which in our view is unlikely to be challenged given its entrenched network effects. As we've stated before: Bitcoin may be inferior to other cryptocurrencies in a technical sense, but its price appreciation and ever-expanding popularity have attracted the best developers and strongest mining support.
Bitcoin's Flash Crash
(Image source: Bloomberg)
Over the weekend, a rumor from Twitter torched bitcoin and many other cryptocurrencies. User known as "@Fxhedgers" circulated a since-deleted tweet that speculated that the US Treasury was looking to charge several financial institutions with using cryptocurrencies for money laundering.
This seemed almost like satire, considering that the US Treasury does not have the authority to charge people with financial crimes. It can blacklist entities, but criminal charges are filed by the Department of Justice. However, in the context of Turkey's move to ban crypto payments on the preceding Friday, the rumor was enough to stoke a broad sell-off (even though dogecoin steadily skyrocketed). Days earlier, China's HSBC banned clients from synthetically accessing bitcoin through shares of MicroStrategy (MSTR).
This sell-off did make apparent the role that ETFs are playing in cryptocurrency markets. Bitcoin was able to sell off so quickly because many would-be buyers rely on access to bitcoin through exchange-traded products, such as the Grayscale Bitcoin Trust (OTC:GBTC). Because the stock market is closed on weekends, there was a liquidity shortage, particularly in the middle of the night.
There is a deep-seated paranoia amongst cryptocurrency investors that regulatory actions will be taken against cryptocurrencies, including bitcoin. This is probably true, but developments in the industry indicate that this is unlikely to include some sort of total ban. Several companies have added bitcoin to their treasuries. The first-ever "digital asset bank" received a federal charter. The CBOE has said they will build out crypto offerings as demand rises. All of this has happened since the start of the year.
Conclusion: An old doge learns new tricks...
(Image Source: Elon Musk)
Dogecoin shows us how silly money can be, acting as a $50B parody of our financial system worth more than Barclays (BCS). If a financial meme can have this big of an impact, it will have a legacy that lasts long after the doge bubble bursts, causing many people to question the current system. Dogecoin makes bitcoin look like a serious reserve asset, an idea that we explored earlier this year.
A reader of our previous article on bitcoin made the perspicacious observation that in the aftermath of the 2008 financial crisis, Treasury Secretary Timothy Geithner told executives at the Council on Foreign Relations that he was “quite open” to a Chinese suggestion to move towards use of an IMF currency basket. This would augment the current system, where the USD serves as the world's reserve currency. Today this idea has been revived by the cryptocurrency community in the form of "stablecoins".
Geithner's comment was immediately walked back as the dollar "tumbled". Aside from making sure that powerful corporations don't also become powerful central banks (see Facebook's "Project Libra"), and ensuring that there is a compliance layer to stop money laundering (see IRS' "Operation Hidden Treasure"), why wouldn't central banks allow for financial innovations such as stablecoins or any other form of digital asset?
Let me be more specific. Should central banks issue a new digital form of money? A state bank token or perhaps an account held directly at the central bank and available to people and firms for retail payments to each of you.... ....this is not science fiction there are central banks around the world that are considering this option...
-Christine Lagarde, Managing Director of the IMF, 11/25/2018
In fact, central banks are explicitly considering the creation of their own. Why should such decisions be made behind closed doors by central bankers? Do we even want to live in a world where the government might create digital money with "smart contract" features that could limit our civil liberties? Do online communities have the right to create their own digital assets?
Recently, the CEO of OpenAI (backed by Elon Musk and Peter Thiel) made the argument that (with the power of AI) the entire world will soon be fervently transformed by software, in a matter of years.
If this new economy is to be created by a global community of software developers, many of whom contribute to open source projects such as R, perhaps they should also have a role in creating a new financial system. This idea is a democratized one.
Anyone can learn to code and join the developer community, thus having a say in how this brave new world is to be built. Could bitcoin be the open source and digital adaptation of an idea that many central banking circles have had for over a decade? We will
