Despite strong community support and impressive marketing efforts, the Dogecoin price has declined consistently for the majority of 2014. The reasons for the Dogecoin price decline are not immediately clear, although the decline may be related to Dogecoin’s economic model. If Dogecoin does not recover soon, Reddcoin may challenge its place as the leading social and tipping currency.
Dogecoin Price Decline Continues
Dogecoin investors should be worried. Despite having one of the strongest communities as well as some of the most innovative marketing projects (e.g. the NASCAR Josh Wise Dogecar sponsorship) in the cryptocurrency universe, the Dogecoin price is falling, and there is no floor in sight.
Over the past 90 days, the Dogecoin price
from 111 satoshis on April 29 to 37 satoshis on July 28. As the CoinMarketCap chart below indicates, the Dogecoin price decline has been quite steady. Dogecoin’s USD market cap has fluctuated based on the price of Bitcoin, but Dogecoin’s price against Bitcoin has consistently declined.
The Role of Inflation in the Dogecoin Price Decline
The Dogecoin price fall could be tied to the coin’s inflationary economic model. The Dogecoin developers initially planned on capping Dogecoin at 100 billion coins, but the source did not include the necessary code to cap the coins. Upon realizing this error, the developers considered eliminating inflation, but they ultimately decided to leave Dogecoin without a currency cap.
Under Dogecoin’s distribution model, roughly 5 billion coins will be created annually after the initial 100-billion coin distribution phase is completed in January 2015.
Inflation drives prices down because coin-holders believe the growing money supply will dilute the value of their investment. Consequently, miners and investors will liquidate their holdings rather than save them long-term. Community stalwarts may hold their coins despite a price decline out of loyalty, but most average investors will turn to competing currencies with non-inflationary models.
Though inflation will certainly affect the Dogecoin price in the future, there is a silver lining. Because the Dogecoin developers have fixed the rate of new Dogecoins that will be created each year, the rate of inflation will decline every year. This means inflation will have a decreasing effect on the value of Dogecoin over the long term.
Will Reddcoin Challenge Dogecoin?
Dogecoin’s tipping empire could face a challenge from Reddcoin, the up-and-comer branded as the “social currency.” Like Dogecoin, Reddcoin is inflationary. The Reddcoin supply inflates at a compounded annual rate of 5%. Because the interest compounds, Reddcoin will actually inflate at a higher rate than Dogecoin beginning in 2016.
However, unlike Dogecoin, Reddcoin is taking steps to ensure that inflation does not scare investors away. On August 2, Reddcoin will transition from Proof of Work (PoW) to Proof of Stake Velocity (PoSV). PoSV is slightly different from traditional Proof of Stake (PoS), but future coins will be created similarly to other PoS coins. Under PoSV, new coins will be minted rather than mined. Reddcoin holders can mint new coins by keeping their Reddcoin wallets open and running. On average, a Reddcoin holder’s stake will gain 5% annual interest, which is just enough to ensure their investment does not lose value due to inflation. In theory, this secures the network by encouraging the community to operate nodes.
Reddcoin’s new strategy seems to be paying off. As the Dogecoin price has declined, Reddcoin’s market cap has soared. After remaining steady at about $1 million for most of May and June, Reddcoin’s market cap has soared throughout July. At present, Reddcoin’s boasts a market cap of $5.3 million, which places it 14th in total market cap. Currently, the Reddcoin price sits at 33 satoshis. If the Reddcoin price continues to increase, it will reach parity with Dogecoin in the very near future.
Nevertheless, investors should remain cautious about Reddcoin. PoSV launches in less than a week, so part of the recent Reddcoin pump could be due investors making short-term speculations. As you can see from the chart above, the Reddcoin price has experienced several significant corrections after quick pumps. Reddcoin may have staying power, but investors should be prepared to face 24-hour price declines of as much as 20% for the foreseeable future.
The rise of Reddcoin does not pose a good omen for the Dogecoin community. However, Dogecoin’s troubles extend beyond coin prices and market cap. Dogecoin faces long-term hashrate issues that could compromise the security of its blockchain. Litecoin creator Charlie Lee has proposed that Dogecoin could protect itself by merge-mining with Litecoin. However, the Dogecoin community has, thus far, rejected Lee’s solution.
Dogecoin may not be dead, but its bill of health is far from clean.
Disclaimer: The author holds small amounts of both Dogecoin and Reddcoin.