Dogecoin (DOGE) Quadrupled in the Past Year, But It's Not a Great Alternative to Bitcoin (BTC)

Dogecoin's latest rally was mainly fueled by Trump's election victory. The rally amped up after Trump said he would appoint Elon Musk and Vivek Ramaswamy to lead the planned Department of Government Efficiency (DOGE) to root out wasteful government spending.

Bitcoin (BTC -0.25%) has more than doubled over the past year and is trading near its all-time high. Its first spot price exchange-traded funds (ETFs) were approved in January, it was halved in April, interest rates were cut twice, and Trump's election victory brought back a stampede of bulls.

But Dogecoin (DOGE -4.26%) -- which was originally created in 2013 as a parody of Bitcoin and named after a Shiba Inu dog -- has more than quadrupled over the past year. Dogecoin's price was often driven by Elon Musk's random tweets about the cryptocurrency. He even made Dogecoin acceptable for certain purchases at his car company, Tesla, in 2022.

Image source: Getty Images.

Dogecoin's latest rally was largely sparked by Trump's election victory. The rally picked up steam after Trump said he would appoint Elon Musk and Vivek Ramaswamy to lead the planned Department of Government Efficiency (DOGE) to root out wasteful government spending. That news -- along with Trump's pro-crypto stance -- helped Dogecoin outpace Bitcoin. So should investors buy this smaller meme coin instead of Bitcoin today?

Dogecoin and Bitcoin similarities and differences

Dogecoin was created from the open source code for Litecoin, another token that was previously forked, or split off, from Bitcoin's blockchain. Like Bitcoin and Litecoin, Dogecoin tokens were mined with the energy-intensive proof-of-work (PoW) consensus mechanism. But to differentiate itself from other PoW tokens, Dogecoin developers launched a new hashing algorithm called Scrypt, which used less power and processed transactions faster.

That tweak caught the attention of online supporters, who dubbed themselves the "Doge Army," as well as high-profile investors like Musk, Mark Cuban, Snoop Dogg, Kevin Jonas, and Gene Simmons. As a result, Dogecoin soared to an all-time high of $0.73 on May 8, 2021 -- a 47,279% gain from its earliest trading price of $0.001540753 on Jan. 23, 2014. That rally would have turned a $10,000 investment into $4.7 million.

Dogecoin has some glaring weaknesses

But that same investment would now be worth about $2.4 million. Two major challenges prevented Dogecoin from becoming the next Bitcoin or Ethereum. First, Dogecoin is an inflationary token with no supply cap. There are currently 150 billion Dogecoins in circulation, and that supply is increasing by about 10,000 tokens per minute. Bitcoin has a maximum supply of 21 million tokens, of which 19.8 million have already been mined. That scarcity makes Bitcoin more like gold and other physical assets than Dogecoin.

Second, Dogecoin doesn't natively support smart contracts, which are used to develop decentralized applications (dApps), non-fungible tokens (NFTs), and other crypto assets. Proof-of-stake (PoS) blockchains like Ethereum support smart contracts, so they are often valued by the popularity and size of their developer ecosystems. PoS tokens can also be "staked" (locked up) on the blockchain to earn interest-like rewards. In contrast, Shiba Inu, which was created in 2020 as a parody of Dogecoin, is an Ethereum-based PoS token that supports staking and smart contracts.

Put simply, Dogecoin's blockchain is faster than Bitcoin's, but its inflationary nature will prevent it from becoming as scarce as Bitcoin. Its lack of support for smart contracts also limits its appeal to developers, who would choose Ethereum or other PoS blockchains to build their apps and tokens.

Why Dogecoin isn't a great alternative to Bitcoin

Dogecoin may be in the spotlight again, but it is still trading well below its all-time high as it hasn't addressed its most pressing issues. Once the current news cycle cools, it will likely give up many of its post-election gains.

Meanwhile, Bitcoin should have more staying power as it becomes the digital gold equivalent for many investors. Its scheduled halvings, which reduce the mining reward by half every four years, should consistently tighten its supply and buoy its value.

More institutional investors could buy Bitcoin, and more inflation-wracked countries could adopt the token as their national currency. So while Bitcoin may not be as exciting or meme-able as Dogecoin, it will likely be a better long-term investment for most investors.