My Joke Cryptocurrency Hit $2 Billion and Something Is Very Wrong
Dogecoin's inventor looks to the past for insight into the future.
Jan 11 2018, 7:23pm
Image: Flickr/Aranami. Composition: Jordan Pearson
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Jackson Palmer is an Australian entrepreneur and technologist best known for creating the infamously successful “joke” cryptocurrency Dogecoin. Currently based out of San Francisco, Jackson works as a product manager but is still active in the cryptocurrency space. Jackson has holdings in various cryptocurrencies, including less than $50 worth of Dogecoin. You can follow him on Twitter and YouTube.
When I jokingly tweeted about “investing in Dogecoin” in late 2013, I never imagined that the tongue-in-cheek cryptocurrency I had just brought into the world would still be around in the year 2018, let alone hit a $2 billion market cap like it just did over the weekend.
Last year saw an explosion of interest and investment in cryptocurrencies across the board, so it’s tempting to see 2017 as the best year to date for the industry. But I feel it is shortsighted to mistake this explosive growth as being sustainable—in fact, I feel 2017 was arguably the worst year for cryptocurrencies yet. To understand why, let’s revisit what I learned from the currency I created as a joke.
Dogecoin started as a parody of the multitude of alternative cryptocurrencies, or “altcoins,” flooding the market at the time. As interest in Dogecoin grew through social media and an active Reddit community, it went on to become an educational gateway for many people dipping their toes into the world of cryptocurrencies for the first time, thanks to its low price and welcoming community.
In 2013, the vision for the future of cryptocurrencies seemed relatively clear: To deliver a peer-to-peer alternative to cash that, through decentralization, did away with the need for trust in financial institutions, which the 2008 crisis showed to be unscrupulous, and often corrupt. Bitcoin, which ignited the cryptocurrency movement in 2009, brought real technical innovation to the table in achieving this vision. Back then, I hoped that through the power of community, a project such as Dogecoin may help drive further awareness of and innovation in that technology.
However, as I quickly learned, a passionate community of people throwing around money is like blood in the water to the shark-like scammers and opportunists who, in late 2014, co-opted the Dogecoin community and fleeced its members for millions of dollars.
Read More: The Guy Who Ruined Dogecoin
By 2015, the energy in the community had changed—those who got burned by the scammers began to disappear and the community’s interest in Dogecoin declined, as did its price in US dollars. At the same time, confidence in Bitcoin was shaken: hacks and scams dominated the news cycle, and merchant adoption failed to grow at forecasted rates. Despite these events, huge sums of venture capital continued to pour into fresh cryptocurrency companies backed only by buzzword-laden websites and lacking any discernible business model.
In light of all this, in 2015 I decided to back away from any involvement in Dogecoin and cryptocurrency in general. I handed development of Dogecoin over to a team of community members that I trusted. I made it clear at the time that any Dogecoin I previously held—the small amount I have now came from people “tipping” me after I left—had been sent to charity drives run by the community, and that I’d made zero profit from my involvement with the project.
I saw the space being overrun by opportunists looking to make a buck, rather than people investing in evolving the technology (which, even back then, we knew was facing real technical issues.) Over the following two years, I monitored the space from afar. What I noticed was a shift away from developing the core technology powering these networks to churning out shiny new projects that shoehorned in “blockchain” wherever possible.
There is a popular saying in financial markets along the lines of, “When your taxi driver is telling you to buy stock, you know it’s time to sell.” Basically, when a stranger with (presumably) little experience in the stock market is giving you tips, it’s an indication that the market is too popular for its own good. Having been out of the cryptocurrency space for two years, in early 2017 when my Uber drivers started talking to me about Ethereum, I knew we were entering a renewed period of speculative crypto-mania.
No trend better exemplified this than the “ICO,” or Initial Coin Offering. In 2017, thousands of fledgling companies collectively raised over one billion dollars (one ICO alone raised $700 million in December) in exchange for virtual “tokens” which buyers could then trade immediately on a secondary market—often for a large profit. I began having flashbacks to the scams from the Dogecoin days. For example, a token called PlexCoin raised nearly $15 million in an ICO last year before Canadian and US regulators froze the creator’s assets and a Canadian court sentenced him to jail.
These concerning observations have led me back into the cryptocurrency space to help educate my co-workers, friends, and family who are asking me if they should pour their money into cryptocurrencies. Hopefully, if I do my job, they will better understand the potential pitfalls of doing so.
Over the past year we’ve seen the collective market cap of all cryptocurrency assets balloon to more than $700 billion USD, largely because of speculative trading. Everyday, it seems there is a fresh news article about the 20 year-old who became a millionaire in Bitcoin. Or in the case of my own creation—Dogecoin—how a currency that hasn’t received a software update since 2015 briefly passed a $2 billion market cap ($1.5 billion at the time of writing).
Read More: A Trip to Dogecoin's First Conference
Dogecoin’s valuation is the result of market mania that has resulted in inexperienced investors buying up low-priced assets on a whim, hoping that they will follow Bitcoin’s meteoric trajectory. This irrational enthusiasm, coupled with large players manipulating largely unregulated markets, has resulted in a weekly cycle of rallies and crashes across just about every crypto asset. While the Dogecoin community on Reddit has seen a recent uptick in participation, the majority of new discussion seems to fixate on the USD price and speculation as to when it will rally once again.
It’s great to see mainstream excitement about cryptocurrency, but the continued focus on price and potential to “get rich quick” distracts from the laudable goals that projects like Bitcoin set out with. Even more importantly, the underlying technology is still facing technical challenges related to scaling that need to be addressed. At the time of writing, it costs an average of of $30 to send any amount of money using the Bitcoin network. At the same time, a token that touts itself as “the blockchain solution for the global dental industry” has just surpassed a $1 billion market cap. Something isn’t right here.
While FOMO-driven amateur investors rush to invest in the next "blockchain for x" ICO hoping for a 100 percent return, merchant adoption of Bitcoin is reportedly decreasing to its lowest level in years. Recently, major players like Microsoft and video game marketplace Steam removed the option to pay in Bitcoin from their online stores.
At the same time, it seems like Bitcoin’s original anti-establishment principles are being diluted even further. We’re seeing money pouring into the industry from large institutional traders, and Bitcoin futures contracts—basically betting on whether Bitcoin’s price will go up or down—have begun trading on Wall Street. Which leaves me asking: what happened to removing the supposedly corrupt financial institutions from the table?
Given the immense price increases and media hype, there's a tendency to see 2017 as the best year for cryptocurrencies yet, but I would argue the opposite. In many ways, 2017 marked the year that cryptocurrency stopped being about technologically innovative peer-to-peer cash and instead essentially became a new, unregulated penny stock market. 2017 was also the year that the very institutions Bitcoin originally sought to dismantle have begun to co-opt it for profit.
Still, I can’t concede that it’s game over for cryptocurrencies. It’s difficult to predict how much the current crypto bubble will inflate, or when it’ll burst (not if). The burning question on my mind is this: Once the cryptocurrency price bubble pops and takes all the hype with it, will the community be able to recover the energy it needs to build real, innovative technology once again?
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