There has been a lot of public debate in recent months about Dogecoin (CCC:DOGE-USD). Is Dogecoin a currency or a security? Is it a good or a bad investment? Does Dogecoin seriously compete Bitcoin (CCC:BTC-USD), or is it just a social media meme?

Today I would like to address another important issue. Is Dogecoin nothing more than a classic pyramid scheme?

What is a pyramid scheme?

I’ll start by defining a pyramid scheme and discuss some of his common traits. A pyramid scheme is an investment model that revolves around the first participants recruiting new participants. The funds of the new entrants are then used to generate returns for the first entrants. To make money on the program, a participant needs more investors to join the program after subscribing.

Pyramid schemes often involve products or investments that have little or no value. New investors are usually recruited by participants touting the huge returns from early investors. In truth, the first investors in a pyramid scheme make a ton of money.

But it’s a zero-sum game, and that money comes straight out of the pockets of subsequent investors. And of course, the pyramid scheme model is ultimately not viable. There is not an unlimited number of new investors to recruit to continue to generate returns for previous investors.

Participants in the pyramid scheme often promise unrealistic returns that should sound too good to be true. Participants frequently expect returns well in excess of historical annual returns of around 8% to 15% of the S&P 500.

Dogecoin as a pyramid scheme

Dogecoin does not generate cash flow. It does not pay interest or dividends. It has no unique utility compared to other major cryptocurrencies. The way to make money with Dogecoin is to buy and then immediately start raising its price by posting memes on social media and telling friends, relatives and passers-by that he’s going to the moon. .

The only way the price of Dogecoin increases over time is as more people or institutions join. The first Dogecoin investors have already made a massacre. Its price has increased by over 13,300% in the past year alone. But if the Dogecoin community does not continue to recruit more buyers, the price will either stagnate or fall.

A share represents a fraction of the ownership of a business. In theory, this business will grow and evolve over time, and this fractional ownership interest will increase in value. But Dogecoin doesn’t grow and create no value no matter how long you wait. Even long-term Dogecoin investors need more buyers to drive the price up.

The point of view of the creator of Dogecoin

Dogecoin creator Billy Markus has openly admitted to creating the cryptocurrency in about two o’clock like a joke.

Markus also recently said that Dogecoin and the rest of the cryptocurrency market was driven almost entirely by the Biggest Fool theory. The biggest fool theory is the idea that only fools buy a particular investment, but they do so in the hope that more foolish people will eventually buy out the investment at a higher price from them.

“I agree with the Biggest Fool Theory that determines most crypto prices, but I honestly wonder what percentage you think a crypto is bought from the utility versus the plus theory. big fool “, Markus tweeted. “From my point of view, it’s about 99.99% bigger than the Fool’s theory.

How to play it

The good news for Dogecoin investors is that there are many people throughout history who have made money with pyramid schemes. The key is to be an early investor. Anyone who invested even a moderate amount of money in Dogecoin a year ago and kept until today is probably already rich.

There is only one question that matters to Dogecoin investors today. Are we still in the early stages of the Dogecoin pyramid scheme, or are we in the late stages? For me, the answer to this question will depend on whether or not companies buy Dogecoin to keep their balance sheets the same way companies like You’re here (NASDAQ:TSLA) bought Bitcoin to diversify their balance sheets. Personally, I believe they will not.

I’m struggling to see enough additional demand from retail investors to push Dogecoin prices much higher from their current levels. Without the companies buying Dogecoin, I think new Dogecoin investors are too late to take advantage of the pyramid scheme. However, if Dogecoin becomes a joint asset on the balance sheets of Fortune 500 companies, buyers today could still arrive early enough to make a murder.

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At the date of publication, Wayne Duggan did not hold (directly or indirectly) any position in the securities mentioned in this article. The opinions expressed in this article are those of the author, subject to the InvestorPlace.com publishing guidelines.

Wayne Duggan has been contributing to US News & World Report Investing since 2016 and is an editor at Benzinga, where he wrote over 7,000 articles. Mr. Duggan is the author of the book “Beat Wall Street with common sense” which focuses on the psychology of investing and practical strategies for outperforming the stock market.