Is Dogecoin better than Bitcoin?

Every time you read about Dogecoin, you will hear the same mantra being recited: “Dogecoin is an inflationary coin, and Bitcoin defeats inflation as there can only ever be 21 Million Bitcoins”. But is this all there is to solve inflation? And is this really an advantage that Dogecoin lacks?

In Germany 1923, Hungary 1946, Uruguay 1970, Bolivia 1987, Yugoslavia 1993, and other 20th-century hyperinflation events, the value of the local currency depreciated at such a rate that a salary was better spent immediately on physical commodities than saved. These economic disasters were all caused by extremely rapid growth in the supply of “paper” money issued by these governments to cover their deficit through this taxation scheme (1). Just in the second quarter of 2020, due to the Covid-19 pandemic, the U.S. Federal Reserve created 3 Trillion USD, currently more than 20% of the existing USD supply (2). As the potential for USD hyperinflation brews, decentralized cryptocurrencies are increasing in historical popularity and value, with promises for a more stable, secure, and functional currency.

Yearly percentage of total M2 type USD created every year since 1982. More than 20% of the existing USD supply was created in 2020.

In contrast to printable money, a cryptocurrency’s supply only grows as participants verify the transactions’ ledger (also known as the blockchain). This process is referred to as crypto mining, where a coin incentive is generated every time transactions are verified by a miner. The size of this reward is also dynamic and differs depending on the math behind each cryptocurrency. For the case of Bitcoin, the reward has been decreasing until only 21 million coins will have been generated. For Dogecoin, there is a yearly cap of 5 Billion coins, which right now represent 4% of the circulating amount and this percentage can only decrease (3). But regardless of the math behind mining, no central entity has any control over the supply of the cryptocurrency or could provoke classic hyperinflation. No government will ever “print” either Bitcoin or Dogecoin at will. Hence, any crypto’s advantage over government money hyperinflation comes from its decentralization, not from having a finite supply limit.

Given that all decentralized coins have a hedge against inflation, then, what are the actual implications of Bitcoin’s absolute 21 million limit? This limit is why Bitcoin is often referred to as digital gold and even though this is a comparable characteristic, there is a clear reason why civilization moved away from trading gold coins. Knowing there is a limited amount of the currency encourages hoarding instead of spending. Plus, this behavior would be further reinforced in a vicious cycle driven by the increasing price of Bitcoin due to the lack of offer (4). But, we do still hoard gold and give it great value, why could this not be the case for Bitcoin? Because gold has had unique physicochemical, malleable, economical, and cultural value for millennia, making it an ideal backup physical currency. Bitcoin’s similarity to gold begins and stops at having a limited supply.

The Balsa Muisca, representing the investiture of the Zipa chief in pre-Columbian gold. The piece is now found in the Gold Museum in Bogota, Colombia.

From a more technical perspective, eventually, Bitcoin's limit also won’t provide a sustainable incentive for verifying the blockchain, which defeats the whole purpose of crypto security. After the 21 million Bitcoins are created, no new coins will be rewarded for verifying transactions. Technically, at that point, transaction fees can pay miners. However, to cover the costs of computing the transaction verifications, the fees need to be very significant, again discouraging spending (4). Bitcoin diehards say that as Bitcoin price increases, the fees will be worth more, but they fail to see that their same argument implies that the cost of goods will also be less Bitcoin. For example, a Tesla Model X is worth 50,000USD or 1.0BTC and if a 1% fee goes to the miner, he gets 0.01BTC or 500USD. If the price of Bitcoin doubles, a 0.01BTC fee is now 1,000 USD, yes, but the Tesla is still valued at 50,000USD now 0.5BTC. The 1% fee is 0.005BTC — still the same 500USD. All this without mentioning that Bitcoin’s ledger, or blockchain, becomes more complex over time, driving up the computing cost of mining (economically and environmentally) in a neverending inflation of transaction fees (4).

On the other hand, the slow 4% increase of total Dogecoins encourages both spending and mining. New coins will be created for continuous transaction ledger verification without transaction fees. Moreover, a growing economy needs to increase the supply of currency as new goods, services, and people are introduced into the market (5). Otherwise, distributing a limited amount of currency over more goods and people causes deflation of goods but also salaries. Think about it, how can a limited currency guarantee a minimum wage as the population increases? Interestingly enough, the world’s GDP grows at an average rate between 3–4% every year (6).

Estimate of Dogecoin supply and ever-decreasingf yearly inflation in the next 30 years.

Finally, we need to also mention that compared to Bitcoin, Dogecoin transactions are faster, easier for businesses to accept, 95% of it is not held by the top 2%, and the ever-increasing number of lost coins won’t guarantee the eventual loss of the entire currency. At the end of the day, historical hyperinflation events match all current economic indicators. The trillions of USD dollars printed to cover the pandemic crisis deficit are already causing a historical increase in the global raw materials like lumber, iron, and even sand (7). The USD hyperinflation is only a matter of time. When it comes, salaries will quickly be exchanged into the best cryptocurrency. Don’t let your hard-earned money devalue when prices start to increase and Do Only Good Everyday.

References:

1. Salemi K., Michael. Hyperinflation. The Library of Economics and Liberty. https://www.econlib.org/library/Enc/Hyperinflation.html
2. Larsen S., Andreas; Sarwe, Mikael. Week Ahead: Let’s Twist Again. Nordea. 2020. https://corporate.nordea.com/article/60539/week-ahead-lets-twist-again
3. Farivar, Cyrus. Dogecoin to allow annual inflation of 5 billion coins each year, forever. Ars Technica. 2014. https://arstechnica.com/information-technology/2014/02/dogecoin-to-allow-annual-inflation-of-5-billion-coins-each-year-forever/
4. Herman, Andre. The Economics of Bitcoin. Durham University, Department of Economics and Finance. 2014. https://www.article78againstnydfs.com/docs/VariousDocs/231964435-The-Economics-of-Bitcoin.pdf
5. Shostak, Frank. Does a Growing Economy Require an Expanding Money Supply?. Mises Wire, Mises Institute. 2015. https://mises.org/wire/does-growing-economy-require-expanding-money-supply
6. GDP growth (annual %) 1961–2019. The World Bank. https://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG
7. Irwin, Neil. Inflation is Here. What now?. The New York Times. 2021. https://www.nytimes.com/2021/05/13/upshot/inflation-is-here-what-now.html