How DOGE popularity is a textbook case study for behavioral finance. And what it means for you

Dogecoin has been one of the hypest coins as of late. Fair enough, it’s hard to pass by a crypto pushed “to the Moon” by the richest earthlings, rock stars, and common Redditors who raked billions on it. Dogecoin generated more money in a year than Walt Disney sales. Its market cap exceeds Ford company and the annual GDP of Tanzania. Much wow!

So what are the drivers of Doge growth? What value does it have? Why is it so receptive to Elon Musk’s tweets? Short answer: behavioral finance. We’ll elaborate on that in a moment.

By the way, Dogecoin is now available for CFD trading at our CEX.IO Broker platform.

What is DOGE?

Started off as a joke, Dogecoin was created in 2013 by software developers Billy Markus and Jackson Palmer. It exists on a Bitcoin blockchain. The symbol of this coin is a viral meme picturing a Shiba Inu dog (Japanese breed) along with intensifying modifiers like “much”, “very”, “such” and improper grammar. 

Doge was a celeb even before the crypto. It appeared on a NASCAR car, and even in tweets of the members of US Congress. And despite the experts pointing at Dogecoin’s technical unreliability, this crypto has become the people’s coin in a wink. Or should we say, in a tweet.

Dogecoin uses development algorithms similar to Litecoin including a simplified scrypt key derivation function as its proof of work. It is possible to mine one block of DOGE per 1 minute.

 

Behavioral finance and DOGE

Behavioral Finance, as its name suggests, studies financial behavior. One drawback of the traditional economic school is that it goes without saying that people only make rational decisions on financial matters. In actuality, even the most professional trader may fall victim to their emotions, cognitive biases, and social influence. At CEX.IO, we even made a real experiment, Trader for a Month, to see how biases play out in practice! 

Dogecoin market dynamics is a striking example of behavioral finance.

The largest stake of DOGE is currently worth $25 billion. One of the Reddit users claims to have raised $460 million out of a $180,000 investment in DOGE.

DOGE has risen 14,000% since the beginning of the year and 48,900% rise since inception after Elon Musk has become the self-proclaimed Dogefather and started endorsing this coin on Twitter.

Elon Musk’s DOGE Tweets influence:

Date  Tweet Price From Price To Rise %
January 28, 2021 Dogue magazine cover $0.0078 $0.0610 682%
February 4, 2021 Dogecoin is the people’s crypto $0.0314 $0.0451 44%
February 7, 2021 Who let the Doge out $0.0491 $0.0769 57%
April 14, 2021 Doge Barking at the Moon $0.0766  $0.3299 330%
April 28, 2021 The Dogefather SNL May 8 $0.2747 $0.6618  140%

 

Common biases in behavioral finance and how they show in DOGE:

 

 

  • Confirmation Bias

In behavioral finance, it is a tendency to pay close attention to events that confirm the investor’s belief and ignore ones that contradict it. In the case of DOGE, it means paying attention only to the news that says about DOGE growth and ignoring bad news.

 

  • The Narrative Fallacy

We all love a good story. And a good joke. A cryptocurrency dedicated to a meme bringing you billions overnight – what can be better? However, in a run after a good story, some investors forget about safety measures.

 

  • Representative Bias 

This bias occurs when an investor thinks that two resemblant events will bring the same outcome. It may apply to the people’s bias that Dogecoin is similar to Bitcoin. So, one may suggest that Elon Musk will influence the DOGE price and adoption the same way that he influenced those in Bitcoin when indeed BTC and DOGE are quite different from each other. 

 

  • Herd Mentality

In behavioral finance, this principle refers to the tendency of many investors to do the same actions that the crowd does. This one is all about social influence and emotion. Amateur investors tend to trust Elon Musk’s Twitter more than the rational analysis of the situation. They also see a surge of demand for DOGE and a rising price, and decide to buy too, since “everybody does it”. 

 

DOGE on CEX.IO Broker 

While Dogecoin is peaking in popularity, it gives a lot of opportunities to benefit from its drastic price movements. However, it comes with increased risks. Financial analysts have been finding numerous arguments proving that DOGE’s price is stimulated mainly by the principles of behavioral finance, instead of any fundamental economic factors. 

Given that, we had to think hard whether or not we should add DOGE to the CEX.IO Broker platform. But we saw the huge demand and we realized that our customers wanted to use this market opportunity and gain from DOGE’s price spikes. So we decided to give you the instrument for that, yet with certain limitations. More of that below.

Now, you can already trade DOGE to USD on our CFD margin trading platform CEX.IO Broker with the following setup:

Now, you can already trade DOGE to USD on our CFD margin trading platform CEX.IO Broker with the following setup:

 

  • Leverage – 2x, 3x, 5x, 10x
  • Long (Buy) only 

Wow, much conditions. Why?

Leverage – the more leverage you take, the greater is the risk. Since the market is susceptible to public sentiment and reactions, it is prone to a sudden trend reversal. By limiting the leverage size, we are helping our users to control the risks.

Shorting (Selling) implies a greater risk for both customers and the market in general. One of the reasons for the so-called “bubble bursts” is the massive selling. That’s why, shorting is usually allowed only in the mature markets, where their sizes make it too difficult and too expensive to manipulate and where participants are better protected. As a rule, short-selling is appropriate in markets with the highest liquidity, price stability, turnovers, time-tested reliability of an instrument, etc. For example, at the stock market, you can sell Apple stocks, but you can’t sell the stocks of an unknown company that entered the market like a month ago. 

Oftentimes, exchanges also implement the listing levels or criteria which denote certain actions and instruments as allowed or prohibited. For example, the Tier-1 instrument allows for short-selling, using as collateral, etc. At the same time, the Tier-3 instrument is prohibited for use as collateral, short-selling, conservative fund purchases, and more.

At CEX.IO Broker, we have some acceptance criteria for the trading rules. If certain factors like the risk of manipulation or volatility are too high, it means that such an instrument doesn’t satisfy the criteria for short-selling.

After a thorough analysis of the market, we concluded that DOGE, at the moment, carries a high risk of manipulation, which means we cannot enable short selling of DOGE with leverage at these conditions. So, if you believe the DOGE price is going down – you should not trade it on CEX.IO Broker. We continue to monitor the market’s maturity, and in the future, we might consider allowing a short if it is safe enough for the market participants.

Conclusion

Dogecoin continues surprising the world every day. Elon Musk went so far in his Dogefather role, that he is to send a Doge-1 satellite to the Moon, for which he already paid in DOGE.

We have received tons of requests across our social media about listing DOGE. Now you’ve got the opportunity to benefit from this market by trading CFD on Dogecoin on the CEX.IO Broker platform.  

Why at CEX.IO Broker for now? Because more experienced customers are trading with derivatives. They have a higher understanding of risks, especially with cryptocurrencies like this.  

We are not offering Dogecoin for spot trading at the moment, but we’re looking into this possibility and will keep you updated.  

Lastly, we strongly recommend that you perform thorough research before doing anything with Dogecoin. We’ve started compiling the list of DOGE pros and cons. What statements would you add or argue? Let us know on our social media channels.

 

Dogecoin Pros and Cons

 

Pros Cons
  • Mining share 

37% belongs to small pools meaning that the mining of Dogecoin is quite decentralized 

  • Supply share

One address holds 28,36% of the entire DOGE circulating supply, meaning that selling it can potentially crash the market

  • Whales support 

Elon Musk, Mark Cuban, Gene Simmons, Snoop Dogg, Kevin Jonas & more

  • Retailers’ support

Audience’s negative reaction to these celebs may drop the price

  • Adoption 

You can pay in DOGE for a gift card in BitPay (spend in Pizza Hut, Amazon, Microsoft), for Dallas Mavericks tickets & merchandise

  • Adoption

There are few crypto exchanges that support DOGE

  • Technical characteristics

Fast mining and large throughput. Some security measures are implemented as well. Generally, DOGE suits for being a payment method

  • Technical characteristics

DOGE doesn’t have a max supply cap. Also, there is no dedicated team of developers meaning no tech support 

  • Rags to riches

Some DOGE investors have raked millions and even billions of dollars

  • Sudden losses

During DOGE’s dip after Musk’s SNL appearance, these investors have lost almost half of their gains

If you have an appetite for risk and desire to take a ride on the DOGE hype waves, we will be glad to see you at broker.cex.io 👇.

Disclaimer: 

The ability to go long for DOGE/USD on the CEX.IO Broker platform is not a recommendation to open long positions. Only traders make the decisions about whether or not they should open long positions or refrain from trading at all. Only traders are fully responsible for the associated risks.

The post How DOGE popularity is a textbook case study for behavioral finance. And what it means for you appeared first on Bitcoin & Crypto Trading Blog – CEX.IO.

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