Is Tesla (TSLA) About to Purchase a Stake in Dogecoin (DOGE) Even Though Elon Musk Called It a “Hustle”?
Dogecoin (DOGE), a cryptocurrency created as a joke, finds itself at the very center of the ongoing momentum push in the wider crypto sphere. Having benefitted from the legendary mercurial temperament of Tesla’s CEO, Elon Musk, Dogecoin may yet traverse new heights if the top global electric vehicle manufacturer were to purchase a stake in the meme coin.
The story of Dogecoin as the center of attention in the financial world is quite rocky. To do justice to this developing phenomenon, we would have to go back to early 2021 when Elon Musk famously declared that Tesla (NASDAQ:TSLA) had purchased a $1.5 billion stake in Bitcoin (BTC) and that the EV manufacturer would accept the top cryptocurrency in the world as payment for its vehicles. This announcement unleashed a fierce rally in not only Bitcoin but also the wider crypto sphere. Musk also intermittently pumped Dogecoin, endorsing it as a viable crypto coin. These endorsements translated into a fierce upward momentum in Dogecoin, with the price action reaching a fever pitch just ahead of Musk’s Saturday Night Live stint. As the loyal fanbase of Tesla’s CEO tuned in to watch Dogecoin get pumped on air, the coin scored an all-time high and was on the verge of achieving parity with the dollar. Alas, those hopes were dramatically slashed as Elon Musk termed Dogecoin – the crypto coin he relentlessly pumped – a veritable “Hustle”. In the ensuing maelstrom, DOGE lost almost half of its value.
Not content with wrecking the budding momentum in Dogecoin, Musk then turned his roving eyes toward Bitcoin. In a surprise announcement last week, Tesla’s mercurial CEO announced on Twitter that his company would no longer accept payment in Bitcoin due to the cryptocurrency’s heightened energy consumption and the attendant adverse impact on the environment.
Tesla & Bitcoin pic.twitter.com/YSswJmVZhP
— Elon Musk (@elonmusk) May 12, 2021
This brings us to the crux of the matter. To say that Mr. Musk reversed course on Bitcoin is an understatement. After all, anyone with even a passing understanding of how that cryptocurrency operates would have been aware of the associated energy consumption. If, however, Mr. Musk was unaware, it hammers home his legendary unpredictability and mercurial temperament. For who else would make a $1.5 billion bet without conducting due diligence? Moreover, this issue around energy consumption is itself a fallacy given that the global banking and financial system consumes energy that is orders of magnitude higher than that consumed by Bitcoin. Against this backdrop, it is clear that a larger game is underfoot. Let’s delve deeper.
If Mr. Musk were serious about the heightened energy consumption of Bitcoin, he would have indicated switching to a cryptocurrency that utilizes a proof of stake (PoS) mechanism, such as Ada. As a refresher, in contrast to the proof of work (PoW) mechanism employed by Bitcoin miners, where miners perform cryptographic calculations in order to win the right to authenticate a transaction, a PoS cryptocurrency requires “miners” to stake their crypto holdings in order to add a transaction to the blockchain, thereby consuming much less energy. However, instead of turning his attention to Ada or other PoS coins, Mr. Musk decided to pump Dogecoin again via a tweet:
Working with Doge devs to improve system transaction efficiency. Potentially promising.
— Elon Musk (@elonmusk) May 13, 2021
Now, consider the wording of this tweet. The fact that Elon Musk is working with Dogecoin developers to improve the meme coin’s inherent architecture indicates that he may push Tesla toward acquiring a stake in Dogecoin. Given that the DOGE shares all of Bitcoin’s shortcomings without offering any differential upside, this may be an extremely risky gambit. Crucially, unlike Bitcoin, the supply of Dogecoin is not capped. This means that the coin may be mined ad infinitum, limiting the upside potential for its price. DOGE also uses a proof of work mechanism. This means that its energy consumption will skyrocket if it starts attracting transaction volumes anything close to those of Bitcoin.
Nonetheless, given Musk’s stated desire to work with Dogecoin developers, there is a sliver of hope that the coin may undergo substantial reform in the near future, possibly even adopting a PoS mechanism just like Ethereum 2.0 or instituting an overall supply cap. While this strategy carries substantial risk, there may be one upside – the coin’s utter vulnerability to Musk’s moves. Having demonstrated his ability to unleash a fierce upward momentum or utter evisceration in Dogecoin, Musk may have just found a perfect tool to buffer Tesla’s earnings volatility. Remember that Tesla made more money in Q1 2021 from selling a part of its Bitcoin holdings than it did selling electric vehicles. Given that the crypto sphere does not attract much regulatory glare from the SEC makes this gambit all the more attractive. Consequently, we would suggest that our readers keep a close eye on this developing story. We will surely keep doing so!