Before buying Dogecoin, there are three things to consider
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Perhaps you’ve seen too many headlines about the explosive growth in value of Dogecoin, or heard too many stories about someone making a life-changing profit on the cryptocurrency, and now you’re ready to jump in.
You may be thinking what if the coin started out as a joke or you can’t pronounce it? It went from under a dime to 60 cents a month ago and you don’t want to miss out.
However, before you buy, here are some helpful things to keep in mind.
1. The suspicion that it is a blister will not help you
Most investors can explain what a bubble is: it is what happens when the price of a good exceeds its real value by far.
And those considering buying Dogecoin probably know that the cost of the digital token, which has increased more than 12,000% over the year, isn’t backed by much more than the hope that it will keep getting more expensive .
This speculation is, of course, what drives a bubble.
Knowing that Dogecoin hasn’t become a much more valuable product in the last year probably doesn’t stop people from taking advantage of the situation to make a profit, experts say.
People buy assets even when they know they are overvalued “because they expect prices to get even higher,” said Bruce Mizrach, an economics professor at the Rutgers School of Arts and Sciences.
And he said, “They all believe they can leak out before the bladder collapses.”
Remember: that’s what everyone else thinks.
“When most individual investors are investing in a growing investment, it is often too late,” said Kent Baker, professor of finance at American University.
2. FOMO usually fails
Dogecoin millionaire stories. People who buy houses thanks to the currency. How could you not be afraid of missing out?
Investors often fall prey to the social tendency to “guard”, Baker said. In other words, they do what the crowd does and believe that everyone else needs to know more than they do. And that there is security in numbers.
“In general, such investors are wrong on both counts,” said Baker.
In reality, other people believe the same things in “in the crowd” with just as little to support them.
3. You may not know its true worth … or many other things
Trying to understand the fundamental valuation of a digital asset is “very difficult,” Mizrach said.
Most stocks, he said, can at least get value for money that tells you what investors are willing to pay for a company for every dollar of its profits. This number can be used to determine whether a company is overvalued or undervalued.
You’re in the dark with Dogecoin.
“The rise in cryptocurrencies is reminiscent of the early stages of the internet bubble when investors tried to value stocks with no profit,” Mizrach said.
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Since it is so new, there is also confusion about how to buy and sell cryptocurrencies, how to protect the tokens from loss and hackers, and how the taxes work.
Given this uncertainty, experts say people shouldn’t invest more in Dogecoin than they can afford to lose.
That’s because with everything that’s new, some things never change.
“There is no free lunch when you invest – higher expected returns come with higher expected risks,” said Baker. “Cryptocurrency prices are very volatile, which means they are very risky.”