Should You Buy Dogecoin After Its 31% Dip?

The cryptocurrency market is on a tear this year. The value of all coins and tokens combined recently hit an all-time high of $3.8 trillion, more than quadrupling from its bear-market low point of $823 billion in 2022.

But those gains have come with significant volatility, especially in the more speculative corners of the crypto space. Meme token Dogecoin (CRYPTO: DOGE), for example, was sitting on an incredible year-to-date return of 414% until last Wednesday, but it has plunged by 31% in the week since.

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Dogecoin is heading into 2025 with the wind at its back, thanks to a more favorable regulatory environment and continued support from the world's richest person, Elon Musk. Therefore, should investors use the recent dip as a buying opportunity?

External forces have triggered volatility in Dogecoin

Elon Musk has been a big supporter of Dogecoin since 2021, when he regularly promoted it on social media and even during his appearance on Saturday Night Live (SNL) in May of that year. He even called it his favorite cryptocurrency.

Dogecoin was trading at $0.0046 per token at the beginning of 2021, and within five months, it had soared by 15,769% to a record high of $0.73. Musk's support was a big contributor to that move, but his SNL appearance happened to mark the peak. Investors realized he didn't have a concrete plan to back up his vocal support for Dogecoin, so it wound up losing 92% of its value by mid-2022.

After remaining mostly dormant in 2023 and for most of 2024, Trump's election win on Nov. 5 was the spark Dogecoin needed to stage a recovery. It appears he will be a very pro-crypto president, and he recently nominated pro-crypto businessman Paul Atkins to run the Securities and Exchange Commission (SEC), pending Senate approval.

That means the crypto industry could face lighter regulation over the next four years, paving the way for new use cases, which might be the key to creating value. However, Dogecoin enthusiasts received another surprise when Trump nominated Musk to head an agency called the Department of Government Efficiency, or DOGE for short. The acronym is a reference to his favorite cryptocurrency, which sent investors into a frenzy.

Dogecoin soared to a 52-week high of $0.47 earlier this month, and it was charging toward its 2021 record of $0.73. However, it has plummeted 31% since last Wednesday, because the U.S. Federal Reserve issued a new forecast pointing to fewer interest rate cuts next year. Interest rates don't affect Dogecoin directly, but a higher cost of money tends to weigh on the more speculative areas of the financial markets. It's easier to profit from borrowed funds when interest rates are low, after all.

Dogecoin still lacks real fundamentals

Dogecoin doesn't have many real use cases. According to Cryptwerk, just 2,412 merchants are willing to accept it as payment worldwide, and many of them are obscure internet businesses, crypto service providers, and even online gambling houses. If consumers can't spend their Dogecoin tokens at their favorite stores, they have no reason to own them except in the hope they will increase in value.

In other words, Dogecoin perfectly fits the definition of a speculative asset. That shouldn't be a surprise considering its founders admitted they created it as a joke back in 2013.

In Dogecoin's defense, no cryptocurrencies have garnered mainstream adoption just yet -- not even Bitcoin, which is the most valuable coin in the world. However, Bitcoin is starting to win over the investing community for its potential as a store of value. Some analysts liken it to a digital version of gold.

Bitcoin has a capped supply of 21 million coins, which should be fully mined by the year 2140. Dogecoin, on the other hand, has a limited issuance per year, but new tokens can technically be mined until the end of time. Therefore, it's unlikely Dogecoin will ever be considered a good store of value because investors' holdings will be constantly diluted with no end date.

Dogecoin could fall even further from here

To figure out where Dogecoin could go next, it might be best to take lessons from the past. The speculative frenzy that drove it to a price per token of $0.73 in 2021 fizzled out just as quickly as it started, and investors who were late to the party suffered substantial financial losses.

Unfortunately, I don't see how the latest rally will end differently. There is no apparent plan to involve Dogecoin in the new Musk-led DOGE agency, nor has there been any change to the token's fundamental outlook. It's possible a lighter regulatory environment will open the door to new use cases, but that is a complete unknown at this stage.

As a result, I don't think the recent 31% dip is an opportunity to buy Dogecoin. Could it go higher from here? Sure. But predicting what speculators might do next is impossible, and Dogecoin might also be headed for another plunge of more than 90%.

Investors should even consider the possibility that the recent peak of $0.47 could be the top for this current cycle.

Should you invest $1,000 in Dogecoin right now?

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Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bitcoin. The Motley Fool has a disclosure policy.