I think it is fairly obvious that when deciding between Bitcoin and Dogecoin, one should probably choose Bitcoin. This article is not about which is a better investment. It is to give you a framework to decide how much of a premium Bitcoin should have over Dogecoin.
Since Doge, Litecoin, and Bitcoin Cash are all tweaks of the original Bitcoin code, they all share many of the characteristics that make Bitcoin sound money. One can potentially argue that it is better to hold any one of them than Dollars.
However, how would you compare the two? And what happens to 2nd best? Silver has held 2nd place to Gold for the longest time. Both Gold and Silver have done well vs the US$ but Gold has steadily increased its lead over Silver.
Let’s first get a basic point out of the way.
Why am I comparing Dogecoin with Bitcoin and not with Ether or Polkadot or Uniswap?
It is NOT because Bitcoin is the largest cryptocurrency. Cryptocurrencies can be divided into 3 broad categories:
1. Currencies - These serve as money and nothing else. The traditional world equivalent would be US$.
Bitcoin, Bitcoin Cash, Litecoin, Dogecoin
2. Platforms - These serve as platforms on which dapps (Decentralized Apps) run. Think of it as Apple iPhone which is a platform on which several apps run.
Ethereum, Polkadot, Cardano, EOS, Cosmos
3. Dapps - The decentralized apps that run on those platforms. Think apps like WhatsApp, Gmail, Uber, Coinbase that you have running on your phone
Uniswap, Compound, Aave, Synthetix, UMA
We compare Doge to the crypto that like itself is designed to be money and not have any other utility.
Let the comparison begin
(The data has been collated from coinwarz.com, bitinfocharts.com, and coingecko.com)
Transaction value in the last 24 hours
In the last 24 hours, the Bitcoin network and the Dogecoin network have both seen $52 billion worth of bitcoin/dogecoin transactions. Let’s think about it. Given that Dogecoin’s market cap is $35 billion, it means that 146% of the market cap changed hands in the last 24 hours. Does this not sound wrong? By comparison, Bitcoin transaction value is 4.62% of market cap. This to me is a clear case of wash trading.
How much of each coin do top addresses own?
The top 10/100 addresses control 5.23%/14.58% of all Bitcoin in circulation. The top 10/100 addresses control 46.65%/67.57% of all Dogecoin in circulation.
There is a high level of centralization in Dogecoin ownership which makes pumping and dumping easier. I suspect some of these top 10 addresses are exchange addresses and represent a group of people and not an individual. but Dogecoin clearly has a problem of centralized ownership.
Supply Cap
Bitcoin has a supply cap. No Bitcoin will be mined after 21 million coins are reached. Dogecoin does not have any such cap. 5.2 billion Dogecoin will be released every year till perpetuity. The fact that the Dogecoin supply will keep increasing makes it less sound money than bitcoin.
Having said that, a situation like the supply of US$ increasing by 20% in one year as happened in 2020 won't happen with Dogecoin as supply increase will not be more or less than 5.2 billion. With a current circulating supply of 129 billion, that is inflation of less than 4%.
Hash rate
Hash rate indicates the amount of computing power dedicated to mining for the network. The higher the hash rate, the higher the security of the network. Bitcoin with 113EH/s vs Dogecoin's 300TH/s has almost 400,000x the hash rate of Dogecoin.
A small point to be mentioned here is that some accidents in Chinese coal mines have led to Bitcoin hash rate suddenly falling. Network hash rate has fallen from a high to 222EH/s on 15th April to 113EH/s now (according to coinwarz.com data). This means that the difference in hash rate is actually much higher.
Mining Algorithm
Bitcoin and Bitcoin Cash use SHA-256. Dogecoin and Litecoin use Scrypt. The mining equipment needed for the two algorithms is different.
One of the reasons like Doge has managed to ramp up its hash rate, to the extent it has, is that it piggy-backed on Litecoin’s hash rate. It implemented something called merge-mining which allowed those mining Litecoin to also mine Dogecoin at minimal additional cost. To increase the hash rate from here, it’ll need to painstakingly add new miners, one by one convincing them to invest in compatible mining equipment. Miners who have committed capital to Bitcoin mining cannot use their hardware to mine Dogecoin. By investing in this equipment they’ve locked their resources to the Bitcoin network for many years to come. Dogecoin cannot poach them.
The other implication of the mining algorithm choice is that it is theoretically easier to mount a 51% attack on Scrypt. Back of the envelope calculations by Coindesk indicate that a 1-week long 51% attack on Doge will cost $8million. Crypto51 had done an estimate of the cost of a 51% attack on the Bitcoin network in December last year and had arrived at the cost of $120mn for a 1-week attack. This cost would be higher today as the bitcoin hash rate has increased since then. The bitcoin number though is purely theoretical when you realize that sufficient mining equipment required for a 51% attack on the Bitcoin network is not available for rental anyway. The equipment ill have to be bought which will make the cost of such an attack run into the billions.
Community
Dogecoin has a loud social media presence. Bitcoin's impressive 113,640 tweets are no match for Dogecoin's 401,940 tweets. Having said that, bitcoin has a far bigger developer community updating and securing the network codebase. These developers are funded by the Bitcoin Foundation, tier-1 crypto focussed companies like Square and Gemini, academic institutes like MIT, and the Human Rights Foundation among others. Dogecoin is unlikely to attract such funding and hence such developer talent. One can argue that Dogecoin doesn’t need top-grade talent as the job of the developer is basically to take Bitcoin software and tweak the same to work for Dogecoin. This would however mean that Dogecoin is happy with second place.
Market cap
Bitcoin is the largest cryptocurrency with a market cap of $1.13 trillion. Doge is the 8th largest at $35 billion. This can lead to the conclusion that Bitcoin has run its course and there’s more upside in the smaller coins. Similar to how a quality mid-cap stock can outperform a quality large-cap name.
I somewhat agree with the above but I'd add that nothing infuriates me more than when finance veterans justify buying dogecoin saying “it only costs $0.35 while bitcoin coins $60,000”. If we start listing bitcoin prices in terms of satoshis (100,000,000th of a bitcoin) then 1 satoshi is worth $0.0006. Would that suddenly make you more bullish on bitcoin?
Final Words
I believe Doge despite its history and the non-serious image is a legitimate token. If you’re untrustworthy of central bank discipline with regards to money printing then it is probably a better store of value than US Dollars. But it has miles to go before it can match bitcoin in security, decentralization, and developer community. Also, the recent price surge reeks of a pump and dump scam.