Get to Know Dogecoin: What Is It and How It Works

Get to Know Dogecoin: What Is It and How It Works

Dogecoin is a unique cryptocurrency that started as a spoof on Bitcoin in 2013 with an initial price of less than a penny.

With endorsements from top entrepreneurs and celebrities and a dedicated following on social media platforms, such as Reddit and Twitter, Dogecoin grew remarkably popular to become one of today’s highly valued digital currencies.

Still, getting your hands on Dogecoin should be done with caution. Buying Dogecoin can be rewarding, but it is not without risks.

Dogecoin Explained

Dogecoin is a cryptocurrency created by software engineers Billy Markus and Jackson Palmer in 2013. The digital token that features the popular Shiba Inu dog meme was developed based on Litecoin and originally started as a joke for crypto enthusiasts.

Similar to other cryptocurrencies, Dogecoin uses its own blockchain network that is regularly updated and uses cryptographic methods to safeguard all transactions.

The meme-inspired crypto employs the same proof-of-work mining model, and miners receive extra Dogecoins as a reward for supporting its blockchain.

You may use Dogecoin to pay or buy an item, although it was not actually designed to be a store of value. Dogecoin is inflationary, meaning more of the digital token is produced every minute of every day, making its supply potentially infinite.

Dogecoin’s speculative price increases can be tough to maintain over time since the blockchain creates millions of new Dogecoins daily as a bonus for the miners’ efforts.

Dogecoin In The Past  

Before its rise to significant fame, Dogecoin was used to raise over $25,000 to help the Jamaican bobsleigh team attend the 2014 Winter Olympics in Sochi. That was followed by crypto users raising $55,000 worth of the meme-inspired cryptocurrency to sponsor a NASCAR driver.

In 2021, Dogecoin made headlines, with Reddit forum r/wallstreetbets looking to drive its value further up to reach the moon.

Tesla Inc. Chief Executive Elon Musk then led the crypto to a $0.68 high in May from a penny value at the start of last year after stating his support for Dogecoin. By mid of last year, Dogecoin’s market cap hit more than $50 billion, making it the fifth-largest cryptocurrency.

By April 2022, Dogecoin’s price has tumbled to about $0.15, although it remains in the top 20 cryptocurrencies in terms of market cap.

Separating Dogecoin from Bitcoin

There are some things that separate Dogecoin from crypto market leader Bitcoin.

Quicker Transactions

Like Litecoin, Dogecoin uses the Scrypt hashing algorithm instead of Bitcoin’s SHA-256.

Scrypt is less complicated than the SHA-256, allowing miners to solve the mathematical equations that conclude and record the transactions more quickly and efficiently. Dogecoin transactions only take a minute to confirm, while Bitcoin transactions can take ten minutes.

Supply Cap

Dogecoin’s and Bitcoin’s supply is also one of the most important differences. As mentioned above, Dogecoin is inflationary, which puts no limit on the number of the crypto that can be created.

However, that unlimited supply may hurt Dogecoin’s value over the long term.

Bitcoin, meanwhile, is deflationary. The world’s biggest cryptocurrency only has a supply cap of 21 million, providing it the advantage of built-in scarcity, which keeps it from being devalued.

That scarcity is also why gold or diamonds are valuable, and several Bitcoin investors recommend holding the cryptocurrency long-term. Considering its finite supply, Bitcoin’s price has the potential to surge further as the demand for it goes up.

Buying Dogecoin

Dogecoin is available to own directly on cryptocurrency exchanges such as Coinbase, Binance, or Kraken. It would also be good for you to have a crypto wallet to have additional security on top of what is provided by the exchange.

But if you plan to purchase Dogecoin only to speculate, you can choose online brokerages, like Robinhood, that support crypto trading. Note that many brokers don’t allow cryptocurrency trading and could hold any stake you may have in Dogecoin.

Before Dogecoin became one of the most highly valued cryptocurrencies, users could earn free coins for performing simple tasks online.

Instead of purchasing the crypto, people, for years, were rewarded in Dogecoin for doing tasks such as watching video clips and ads, checking out apps and games, or answering surveys. That is hard to come by now, however.

Dogecoin as an Investment

Dogecoin can be an ideal investment in the short term, considering its unlimited supply and constant flow of new coins every day. However, if you’re looking to invest over the long term, Bitcoin would be a better option than Dogecoin since it continues to gain value due to its fixed-supply scarcity.

Moreover, Dogecoin lacks assets or cash flow, like many other cryptocurrencies. That means its price depends solely on what investors are willing to pay for it. The main factor that impacts the appreciation of this crypto is speculators’ optimism, or what is known as the greater fool theory of investing.

While the people who bought Dogecoin prior to the significant surge in 2021 have reaped the rewards of their efforts, you need to be careful and really think about whether you want to own Dogecoin as an investment.

That’s because the day-to-day release of a new Dogecoin in the market keeps dragging down its value.

Some advocates have said Dogecoin may regain momentum this year and beyond as more companies start adopting the crypto for products and services, treating it more of a feasible currency than a speculative asset.

Another thing you need to consider is Dogecoin’s additional security risks that other cryptocurrencies don’t have. Dogecoin is relatively secure, although it does not practice the same security and code-level scrutiny as Bitcoin or Ether.

This crypto also doesn’t exactly have a powerful mining community, making its network more at risk of encountering a mining attack than Bitcoin’s.

Buying cryptocurrency in general carries risks. Therefore the best thing to do is start small and let yourself grow accustomed to the system. Still, try not to put a considerable amount of your investment dollars in Dogecoin, which was initially created to poke fun at the crypto space.

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