Professor Erkis, what will be the next GameStop? I’d like to get some quick profits like that. What do you think about Dogecoin?
It seems like I get asked about this almost every day. Thanks for asking and keep the questions coming! First, let’s recap what happened with GameStop. The stock had a price of about $20 per share on Jan. 12, rose to about $40 on Jan. 20, $65 on Jan. 22 and maxed out at $483 on Jan. 27.
These price increases were unusual and, as I explained in a prior column, not sustainable. At the end of January and into February, the stock price started falling, people started selling and the price dropped to $50 per share by early February. It’s important to remember that for everyone who buys GameStop stock, there is a seller of the stock on the other side of the transaction. People who sold at the top, and are now posting their stories on social media, sold to others who lost money, who are less likely to publicize their mistake.
When there is a buying mania, getting in early and getting out at the right time (before the mania buying ends) is everything. That is why chasing the next hot stock or other hot assets for speculative purposes can lead to large losses. It’s really hard to sell when things are rising fast. It’s human nature to expect the gains to continue and wait for that first price drop. But that is when everyone else will try to sell too. Those who sell late can lose money.
Dogecoin is a great example of the concern of some that there is too much speculation in the market right now. Dogecoin began in 2013 and according to Dogecoin’s Twitter account @dogecoin, “Dogecoin is an open source peer-to-peer cryptocurrency, favored by shibas worldwide.” Shiba Inu is a breed of dog from Japan. It started as a joke and has been used throughout the internet to show appreciation, like a tip. Its value has been less than one cent for many years—until recently.
Cryptocurrency is not widely used at this time and there are many types of cryptocurrency out there, with Bitcoin being the most famous. It’s not possible to know at this time the long-term value of any cryptocurrency. The long-term value will depend on when (if?) each type of virtual currency is widely adopted for purchases of real goods. It could be worth a lot or could end up being totally worthless. In my opinion, this is the definition of gambling.
My advice is not to speculate much of your money on the next hot thing or on cryptocurrencies like Bitcoin or Dogecoin unless you believe in the investment over the long run. Invest in the broad market where you are buying an ownership interest in great companies with fantastic products and good business models. If you want to speculate, use money that you can lose and try to have fun with it. Maybe you will get crazy GameStop-like returns, but more likely you will lose money in the long run.