19 April 2021updated 09 Sep 2021 10:55am

Is the Dogecoin bubble as irrational as it looks?

The joke currency is able to exploit the group psychology of the internet in ways that other investments cannot.

On the afternoon of 16 April, the total amount invested in Dogecoin, a joke cryptocurrency, exceeded $52bn, larger than the market capitalisation of Barclays or Ford. The 1.3m people on the Reddit forum dedicated to Dogecoin constituted, at the currency’s peak, an economy with a greater money supply than the 1.3m people who make up the population of Estonia.

It is no insult to describe Dogecoin as a joke. Its creator, Billy Markus, a software engineer from Portland, Oregon, has said openly that he built the currency “for sillies” in 2014, when he copied the code used for Bitcoin and added a picture of a funny dog. But the popularity of that joke has made it a major investment vehicle.

Why are people investing so much money in something that is so obviously a bubble? And could the Dogecoin craze – surely the definition of irrational exuberance – be a warning sign for other markets?

In June 2020, Steve Sosnick, chief strategist at Interactive Brokers, coined a new phrase to describe the weirdness in financial markets that were, during a time of deep recession, recording record gains in prices. Most recessions lead to a “flight to quality” as investors close their riskier positions in favour of “safe harbour” investments such as government bonds. But in 2020, investors piled in to companies even as they went bankrupt, displaying an appetite for risk that seemed at odds with what was happening in the real world. This was not a flight to quality, wrote Sosnick, but “a flight to crap”.

Viewed as a normal investment, Dogecoin is crap even in comparison to other cryptocurrencies. Markus wrote this year that he “threw it together” in “about 3 hours” and little development has taken place since then. Bitcoin’s evangelists say their “deflationary” currency holds value because Bitcoin gets harder to produce as time goes on and there is a finite supply. The same is not true for Dogecoin; you can make as many as you like, and the fewer people there are “mining” new Dogecoins, the easier it is to make more. There are already more than 129 billion.

But Dogecoin’s success may not be as irrational as it looks. As a meme, it is able to exploit the group psychology of the internet in ways that other investments cannot.

In the 1960s and 1970s, a discussion emerged around how ideas evolve and whether there were parallels with the natural selection that applies to genes. In 1970, the French biologist Jacques Monod wrote that part of what made an idea successful at self-replicating was its “performance value”. If a group of people are made more cohesive, more confident and more ambitious by an idea, that group will grow as more individuals seek the benefits associated with performing it, and more people will perform the idea for a still larger audience.

Self-replicating ideas – or memes, as Richard Dawkins would call them in The Selfish Gene (1976) – became powerful with the rise of the internet and social media, because these media are interactive. Online, people do not simply consume information as they do in libraries or cinemas, but interact with it in a performative way.

As a meme, Dogecoin has a real advantage over other investments. The fact that it is a joke means it is good at growing its community and making it more cohesive. Jokes have profound social benefits for in-groups; they strengthen the identity of the group itself and the individuals within it, even if they are offensive (as long as they’re told by members of that group). To buy Dogecoin is to make a self-deprecating joke about one’s own ability to invest, but it also buys access to an in-group, a common ground on which to repeat the same fun idea. Dogecoin’s status as a useless prank supplies the confidence and cohesion that Monod said are essential to the success of a spreading, self-replicating idea.

And the more a memetic currency spreads, the more ambitious its exponents become. In July 2020, an influencer called James Galante posted a video on Tiktok urging people to “get rich” by buying Dogecoin, which was then “practically worthless”, and promoting the idea to everyone else in the social network’s claimed community of 689 million users. A rise in the price of Dogecoin to $1 would, Galante estimated, turn an investment of $25 made at that time into more than $10,000. Half a century after Monod wrote that ambition is the other characteristic needed for success in the “selection of ideas”, the idea that Dogecoin can make you rich has been repeated to Tiktok users almost 400 million times.

Even the fact that Dogecoin is a con may be in its favour. The South Sea Bubble in 1720, Railway Mania in 1847, and the dotcom boom in the early 2000s all collapsed because the real business activities that were being speculated on were oversold. But many of Dogecoin’s investors appear to be well aware that it is not going to become a medium of exchange or a long-term store of value. They know the emperor has no clothes and they still want a selfie with him.

If Dogecoin does threaten other markets, then, it’s not the amount of money invested in it but the shift it represents in broader investing behaviour. At the turn of the millennium, the US economist Robert Shiller highlighted the influence of the internet, increases in gambling, greater trading volumes and other cultural factors as part of an environment of “irrational exuberance” that presaged a bursting of the speculative bubble. The question today is not whether the crash will happen – it happened in 2020, and the trillions spent on QE have only helped fuel today’s speculative mania – but whether governments, companies and investors can continue to spend their way out of it.

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