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Dogecoin Shows that the Markets are Frothy

While digital coins such as Bitcoin and Ethereum are gaining widespread acceptance, several smaller alternative coins make unexpected headlines. In the last week of April 2020, Fed Chair Powell made some unusual comments about Altcoins that turned several heads. In a press conference Wednesday, following the decision to keep short-term interest rates unchanged, Powell was asked whether he believed there was a risk to financial stability driven by cryptocurrency. The mandate of the Federal Reserve is to maintain price stability while maximizing job growth; when the Fed sees something out of the ordinary, it’s their job to bring it to the attention of congress.

Defying Critics

The Dogecoin price has defied critics who have warned its price is likely to come crashing down as quickly as it has risen. The surge in the price has increased its market acceptance. Cryptocurrency traders hoping Dogecoin will hit $1, up from around 38 cents, continue to pile in. Elon Musk, who happens to be a cryptocurrency fan and a long-time supporter of Dogecoin, has helped buoy the dogecoin price, regularly tweeting dogecoin memes and jokes, and now is referred to as the “The Dogefather.”

Dogecoin has achieved a market value that now puts it in the top ten and looks set to break back into the top five with its total market value currently just under $50 billion. This market value compares to nearly $1 trillion for Bitcoin. Dogecoin is up more than 6,000% year to date.

Is the Market Frothy

Markets can stay irrational for longer than most can stay solvent. For this reason, when a Fed Chair discusses irrational exuberance, which was the case in 1996 when then-Fed Chair Allen Greenspan discussed the Dow Industrial Average, market participants need to reflect with a grain of salt. U.S. Federal Reserve Chairman Jerome Powell thinks capital markets, as typified by the dogecoin craze, are a “bit frothy.” He also admitted that the central bank’s easy-money policy might have had something to do with that froth. 

The Fed is facing that they need to keep interest rates at zero percent and keep their bond purchase program intact. The easy monetary policy, which is fixated on the U.S. economy, is helping to fuel some riskier assets. If you are a saver, you can barely get 0.2% in your savings account, which leads you to take riskier bets to generate gains on your savings. In addition, U.S. consumers are still willing to spend, and the stimulus has helped them save. The U.S. Commerce Department reported that March personal income increased by 21.1%, which was the highest since the agency began recording these figures going back to 1959. This scenario is the result of new $1,400 stimulus checks that people are starting to spend. Now that people have money in their pocket, spending is beginning to accelerate. Spending was also up sharply, increasing 4.2%, which was the steepest month-over-month increase since last summer. With free money in their pocket, given to them by the government, many people are savings, and some are spending. Others are now investing in speculative instruments like Dogecoin.

 

The Fed Chair was explicitly asked about cryptocurrencies. The question was framed amid the backdrop of a relationship between low interest rates and easy monetary policy sparking increased interest in Gamestop stock Dogecoin. The Fed Chair said that the froth occurring in the capital markets is due to the zero-interest-rate policy he and the rest of the Fed have created. He also said that the vaccine rollout and the movement back to normal also develop an overvalued market with many instruments surging to unattainable levels. 

The issue is that to combat the fallout from COVID-19, central banks worldwide have continued to flood new money into financial markets, which, in turn, has had a significant impact on cryptocurrency through asset price inflation. Chairman Powell was upbeat about the U.S.’s prospects for a swifter economic recovery, pointing toward “very well-capitalized large banks” and low funding risks amongst financial institutions.

The Bottom Line

The upshot is that crypto trading, especially the altcoins like Dogecoin, are experiencing record price moves on the back of easy monetary policy provided by central banks worldwide. The Federal Reserve in the U.S. has kept interest rates at zero for nearly 1-year, and there is an expectation that the Fed will change interest rates stable in 2021. Many Federal Reserve followers believe that interest rates will remain unchanged until late 2022. The Fed has also said that it will continue to purchase bonds throughout the year, which will keep a cap on interest rates and push investors further down the risk curve. This scenario is good news for products like Dogecoin, which will attract investors as the altcoin price continues to soar to new highs. 

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