Is there any safe way to invest in Dogecoin?
2021 becomes the year of Doge (short for Dogecoin cryptocurrency). At the beginning of the year, Dogecoin traded for about half a cent. At the beginning of May, it was already worth about 69 cents, and if you invested $ 1,000 in it on December 31, 2020, then in less than five months you would already have $ 138,000
But currently, the Dogecoin price has already dropped more than 50% from its highs. What happens if the bubble bursts? Here’s what you need to know for those who are going to invest their money in this cryptocurrency.
Should Dogecoin Investors Worry About Bearish Market?
In terms of the stock market, a bear market is defined as a 20% drop from recent highs. Bear markets are relatively common and can occur for a number of reasons. For example, the US housing market crash triggered bear markets in 2008 and 2009, and the COVID-19 panic triggered a short-term bear market in 2020. Historically, the stock market has always recovered from the next phase of the bear market.
But don’t count on Dogecoin also necessarily recovering from its recent drop from the highs. Shares represent the ownership interest in a real company – physically existing, operating and generating income. While some of the issuers of stocks will suffer some losses or even crash, most large corporations are quite capable of surviving even a prolonged economic downturn.
Basically, the only source of Dogecoin’s value is that its holders believe in it. Its meteoric rise in prices was almost entirely triggered by social media, especially tweets from Tesla CEO Elon Musk.
As of mid 2021, Dogecoin is of extremely low utility. Few people accept it as payment. By the way, one of the reasons for attracting investors’ attention to Bitcoin is the limited supply of it. Ultimately, only 21 million coins can be mined and not one more bitcoin. And scarcity, as you know, leads to an increase in demand. At the same time, the finite amount of Dogecoin is not limited in any way, that is, you can mine an infinite number of them – well, what value can we talk about here?
Dogecoin may enter a bear market phase for the same reasons as the stock market, such as panic over the state of the economy due to the coronavirus pandemic.
However, since the value of Dogecoin is largely based on the hype in the media and social networks, every little thing can lead to its collapse. In mid-May, the price of Dogecoin first fell by more than a third, and then rose again only due to two tweets by Elon Musk. And more recently, it flared up again after Musk reported that he had got himself a Shiba Inu puppy **.
** It is “in honor” of the dog of this breed that this cryptocurrency is named
How to Safely Invest in Dogecoin
There is nothing wrong with buying a lottery ticket, betting a few dollars on your favorite team, or just slipping some cash from a slot machine. The same applies to the risk of a small amount of money invested in Dogecoin.
But at the same time, you need to be aware that this is just a game, and by no means a serious investment. It is very important to adhere to the following rules here:
Rule one: only invest what you can afford to lose
The most important rule of investing in Dogecoin is that you should only buy this cryptocurrency if you are ready to lose 100% of your investment.
Do not flatter yourself in the hope that you can sell Dogi when the bubble starts to burst. This is exactly what most of the rest of the holders of this cryptocurrency are planning to do. When the panic starts, it is very likely that you will have to sell your coins for much less than you paid for them (this is even if you manage to sell anything at all).
Rule two: don’t spend your investment budget on it
A good rule of thumb is to form your investment budget by regularly channeling 15% -20% of your income into it. But do not consider buying Dogecoin with these funds, and in any case, do not cash out your other investments for this.
That 15-20% is meant to create enough savings to support you for at least a few decades from your retirement, and Dogecoin is still too volatile to be considered a safe investment. If you are going to buy Dogecoin, then set aside money from your budget for discretionary spending (such as dining, recreation and entertainment).
Rule three: do not borrow to buy Dogecoin
Remember the first rule of Dogecoin – only invest what you can afford to lose? Keep in mind that by going into debt to buy this cryptocurrency, you can lose everything you currently own.
Some platforms allow you to invest in Dogecoin using leverage. This is how it works:
- If you want to invest $ 5,000, you can put in $ 2,500 in cash and then use another $ 2,500 of the broker’s borrowed funds;
- If your coins double in value, you will, in effect, triple your profits. The value of your investment will rise to $ 10,000. You would return $ 2,500 to your broker and make $ 5,000 on your $ 2,500 investment.
But margin is dangerous, especially for volatile investments, because it increases not only potential profits, but also potential losses.
In the example above, a 50% drawdown could wipe out all of your investment. If the value of your $ 5,000 investment falls in half, you will lose all your investment as you have to pay the remaining $ 2,500 in debt to your broker.
The staggering returns that Dogecoin could bring this year understandably could lead to some fear of missing out on opportunities. But don’t let greed cloud your mind. Consider Dogecoin as it is, namely, not as a serious investment asset that has real value behind it, but as a kind of entertainment like buying lottery tickets or playing roulette.
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