The legend of GameStop and the tales of how a decentralized network of Redditors successfully called Wall Street’s bluff and beat them at their own game will live on for decades. Although the short squeeze organized by Wall Street Bets was incredibly successful, I think it's important that we don't confuse a one-time event with a successful long time investing strategy. In this post, I want to explain the differences between the GameStop short squeeze and the DOGE pump and what it could mean for investors.
Before I begin this post, I want to point out that I am 100% not against DOGE or any other cryptocurrency. However, I have noticed that a lot of people with very little experience in the cryptocurrency have been snapping up DOGE with the hopes of striking it rich on the next “GameStop” and I want to provide a bit of "expectations management" for newbies considering investing in DOGE.
Why GME Was Successful
First off, it's important to point out the GameStop short squeeze was wildly successful. Individuals made millions, hedge funds lost billions, and a 10 year old made over five thousand percent profit. The GameStop short squeeze was hailed as a success of common, average investors banding together and taking collective action to topple the Wall Street giants.
However, it's important to realize that GameStop wasn't successful simply because a bunch of amateur investors decided to get together and pump up the price of a random stock. Rather, GameStop was successful because a bunch of amateur investors decided to get together and pump up the price of a stock that had an underlying financial imbalance to take advantage of.
By this point, it's well-known that GameStop was shorted over 100% which means that more shares were shorted than were actually in existence. Once this was discovered, the amateur investors were able to take advantage of it and drive up the price. Driving up the price led to a cycle in which the hedge funds were required to purchase shares at a higher price to cover their short positions, which led to a further increase in price.
True, individuals coming together and pumping up GameStop was part of the reason GameStop was successful. However, the second part was the underlying short positions. I'm afraid that many people saw the success of GameStop and erroneously assumed that simply mass purchasing an asset was a surefire way to achieve profit.
DOGE Isn't GME
Over the past couple of days, I have heard a lot of friends and acquaintances talking about investing in DOGE. Although I am always excited to welcome newcomers to cryptocurrency, many of these people have never expressed a previous interest in cryptocurrency, and I'm afraid that a lot of people are simply jumping on a bandwagon thinking that they can pump up DOGE and enjoy massive profits similar to of GameStop.
However, I there's an important distinction that needs to be made. GameStop was a company whose shares were fundamentally imbalanced. DOGE is a cryptocurrency (invented as a meme coin) that has no underlying imbalance to exploit. In contrast to GameStop, There aren't any hedge funds that have billions of dollars worth of short positions in DOGE. if the price of DOGE increases, hedge funds will not be forced to buy DOGE thus increasing the price further.
Further, there was a psychological motivation for the GameStop pump as people saw it as a war between the masses and the Wall Street 1%. That same fervor is missing from the DOGE pump.
The key difference between GameStop and DOGE is that the initial pump pressure on GameStop triggered the “short squeeze” in which hedge funds were forced to support the price even further. With DOGE the pump is just that….a pump.
Is DOGE Price Justified?
DOGE has widely been regarded as a “meme-coin”, and for most of its existence, the price has barely been above a fraction of a cent. Although the price has recently spiked, it's important to ask why the price has spiked. Has DOGE been adopted as a payment option by a major retailer? Has it announced a new DeFi protocol to overthrow Ethereum? Of course not!
If you need any more evidence that DOGE’s current price is fueled by hype, it is listed as a top 10 cryptocurrency on CoinGeko among ETH, BTC, and Polkadot. Look at the value that Bitcoin brings to the world as the first crypto and most widely recognized coin. Look at ETH and its status as the “fuel of the decentralized web.” Look at Polkadot and it's a possibility to integrate various blockchains into a comprehensive network. What does DOGE bring to this top 10 community?
IMO There's A Lot of Hype
In my opinion, it's evdent that the rising price of DOGE can be attributed to a perfect hype storm of overzealous traders hoping to carry the momentum of GameStop to crypto and some half-joking tweets by Elon Musk.
When a massive increase in price is attributed to hype instead of underlying changes in the fundamentals, it becomes a game of hot potato in which everybody tries to hold on as long as possible hoping the price will go higher while also thinking that they will be able to sell before everyone else pulls support and the price plummets.
Predicting the pop of a hype fueled bubble is notoriously difficult, but it seems that they need an ever-increasing amount of hype to sustain and increase the price. So, we already have the GameStop situation fueling DOGE price and we have the tweets of the world’s richest man and supreme meme-lord pumping DOGE. Given the exceedingly high level of hype around DOGE, I find it difficult to imagine a situation in which any further hype could increase the price further.
What Would I Do?
Nothing in this article is financial advice, but I think that it is important to recognize the importance of “profit-taking.” On 1-27-2021 DOGE was trading at around $.007 USD, now it is $.07 USD which means that the price has seen a 10X increase in less than a month.
My personal opinion Is that the current high price of DOGE is due to a perfect storm of factors and is not sustainable in the long run. I know that it's tempting to want to hold on hoping for an even higher price, but as someone who is a very risk-averse investor, I would be more than content to sell for a 10X profit instead of trying to hold on and watch the price plummet back down to fractions of a cent. This is especially true if I would have bought DOGE back when the price was less than a cent.
Conclusion
Obviously, this isn't financial advice and everyone has to make their own decisions. However, I hope that this article gave a little bit of perspective regarding the differences between GameStop and Doge.
As always, thanks for reading!
References
https://bgr.com/2021/02/02/gamestop-stock-gme-sale-10-year-old-reddit/
https://www.coingecko.com/en
https://www.investopedia.com/short-sellers-lose-usd5-05-billion-in-bet-against-gamestop-5097616
https://twitter.com/elonmusk/status/1357241340313141249?ref_src=twsrc%5Etfw%7Ctwcamp%5Etweetembed%7Ctwterm%5E1357241340313141249%7Ctwgr%5E%7Ctwcon%5Es1_&ref_url=https%3A%2F%2Fwww.tmz.com%2F2021%2F02%2F06%2Felon-musk-says-dogecoin-is-the-future-of-cryptocurrency%2F
Image Credits
https://unsplash.com/photos/NPlMmVsC40I
https://unsplash.com/photos/By-tZImt0Ms
https://www.canva.com/
