Wednesday, April 21, 2021

Why did Dogecoin take off but Feathercoin didn't?

Dogecoin makes us all shake our heads. Introduced in December 2013 as a joke, Dogecoin is now worth over $50 billion, more than Ford Motor Co. Meanwhile Feathercoin, a more serious cryptocurrency that debuted in April 2013 (and initially worth more than Dogecoin), is currently valued at a tiny $10 million.

How are we supposed to understand the strange thing that is Dogecoin?

Let's start by exploring what these odd instruments are. While Dogecoin and Feathercoin seem like an entirely new phenomenon, I'd suggest that they're both really just an updated version of a fairly old financial instrument. You may remember those chain letters your parents used to get in the mail. "Send $5 to each person on the list, then copy it (adding your name to the bottom) and send to their friends," the letter would say. "Then wait for the money to flow in."

Old fashioned chain letters were simple ranked lists that propagated through the post. Propagation occurred in a decentralized manner. There was no "schemer" administering the whole thing. Each player was responsible for abiding by the letter's rules.

Dogecoin (along with Feathercoin) is an updated version of your parent's decentralized chain letter. To begin with, the deployment mechanism is different. Doge propagates over the internet, not the post. Secondly, Dogecoin software ensures honesty. By contrast, old fashioned chain letters – reliant as they were on pen, paper and photocopy machine – were dogged by cheaters who snuck their name to the top of the list.

Rather than have people manually append their names to the list, Dogecoin software creates all the entries in at the outset. And instead of being hierarchical, all spots in the Dogecoin list are equal, or fungible. (All of this goes for Feathercoin, too.)

But other than that, the core concept of a chain letter remains the same: those who already have a spot in the decentralized list are paid off by late-comers.

Sophisticated markets have sprung up to serve those who want to buy & sell these modern honest and fungible chain letters. PayPal, Robinhood, and newly-public Coinbase all let users buy Dogecoin. And so Dogecoin has been effectively fused into the regular financial system.

This degree of mass adoption never happened with your parent's chain letters. Prior to the emergence of cryptocurrencies, chain letter list entries weren't fungible. And so secondary markets never developed. Lacking any sort of integration into regular finance, the chain letters of the 1980s and 90s never went beyond being a sketchy underground phenomenon.


Fans of honest & fungible chain letters (or HFCLs) like to explain them by adopting the complicated rhetoric of monetary economics. Feathercoin says it is for "feather lite payments." More famously, Bitcoin has been variously marketed as a "coin", a store of value, digital gold, or a form of electronic cash destined to "replace fiat currency." This has given the cryptocurrency sector a certain gravitas.

But as Joe Weisenthal points out, Dogecoin doesn't have any of these pretensions. It's just a fun token with a Shiba Inu dog as a mascot. And so all of the rhetoric that traditionally gets attached to cryptocurrency is conveniently stripped away. We get to see Dogecoin and Bitcoin for what they truly are, HFCLs.

Dogecoin's cuddly Shiba Inu has proven be a great tool for propagation, better even than bitcoin's marketing strategy of co-opting the stodgy lingo of monetary economists. In the chart below, I compare the market capitalization of the first 2,690 days of Dogecoin and Bitcoin respectively.

After 2,690 days, Dogecoin's market cap has hit $52 billion. This outranks bitcoin's market cap of $7 billion when it was 2,690 days old. Bitcoin didn't breach the $52 billion level until day 3137, more than a full year (447 days) after Dogecoin did. 

Think of market capitalization – the number of list entries multiplied by their current market value – as a measure of an HFCL's success. But take that number with a grain of salt. If all existing list entry owners actually did try to sell at once, an HFCL's value would fall to zero.

Nor is this the first time that Dogecoin has moved ahead of its older HFCL cousin. As the chart above shows, Doge's market capitalization outranked bitcoin through much of its early life. It also took the lead around days 1,300 and 1,600.


Bitcoin fans aren't pleased. Dogecoin is a bit like your embarrassing younger sibling, the one that you want to hide in the closet because he/she reveals a little too much of the family's foibles. Cryptocurrency is supposed to be about monetary revolution, not fun dogs.

Bitcoiners have adopted various mental blocks to avoid being associated with coins like Dogecoin and Feathercoin. This involves publicly tarring any coin that isn't Bitcoin as a memecoin or a shitcoin. Not only are Dogecoin and Feathercoin categorically different from Bitcoin, they claim, but the category that they belong to is an inferior one.

I'll grant there are some differences, but none as deep as bitcoiners might prefer. Yes, Bitcoin is a bit older than Doge and Feathercoin. And they all have very different marketing techniques i.e. fun vs serious. And one of them, Dogecoin, has been (pound for pound) a bit more successful. But apart from that, they're all the same thing. They are all HFCLs.


Whenever experts warn against chain letters, the point they always bring up is that chains cannot be sustained indefinitely. For everyone to make money, a chain letter must grow exponentially. But at some point the math stops working. There won't be enough people left on earth to feed the chain letter.

Does cryptocurrency have to end in tears? 

I'm not so sure. Yes, HFCLs require a constant stream of new players to buy in so that earlier players can exit at a profit. At some high enough market capitalization, there simply won't be enough buyers on earth to pay off ensuing waves of sellers. The HFCL collapses.

It doesn't have to collapse to zero, though. After a 90% or 95% fall the HFCL's price will start to stabilize. The peak-collapse-trough-mania-peak-collapse-trough-mania cycle begins anew.

Feathercoin offers a good template. Feathercoin and Dogecoin were both part of a huge influx of new HFCLs in 2012 and 2013. This crop included Peercoin, Terracoin, Novacoin, Litecoin, Sexcoin, Worldcoin, Ixcoin, and hundreds of others. You can see some of them on the list in the tweet at top of this post. Funny enough, I wrote about the 2012-13 cryptocurrency wave on my blog: see here and here. (Wow, hard to believe I've been doing this for so long.)

Below is a chart of Feathercoin's market capitalization over the last eight years. It has generally moved around between a trough of $100k-$1m and a peak of $10m-$100m. (Note that I am using a log scale axis.) Buy Feathercoin early and hold till its peak and you've effectively turned $100 into $10,000. It is this whiff of huge gains that tempts people into playing HFCLs. Buy too late, however, and your $100 becomes $1.

Of the 2012-13 crop of HFCLs, many of them look like Feathercoin. They haven't grown, but they still exist. Dogecoin is different (and so is Bitcoin). It shares the same general peak-to-trough pattern as Feathercoin. But its peaks and troughs have been steadily rising. 

What I think is happening here is that there is a huge pent up demand to play HFCLs. They are a fun way to potentially make huge amounts of money. But this demand eventually gets focused on a few lucky chains. After all, the market doesn't need 200 HFCLs when two or three large one will do. 

How does the market settle on two or three? I suspect it probably comes down to luck. Finicky things like mascots, logos, influencers, and catchy names probably play a role too. In Bitcoin's case, being first is a huge benefit. And so most HFCLs sort of putter around like Feathercoin. They don't die. But they don't expand either. 

I suspect that Dogecoin and Bitcoin will eventually follow the same pattern as Feathercoin. Growth will peter out. Peaks will start to roughly align with previous peaks. Troughs will form at the same level as previous troughs. And in-between these peaks and troughs, huge fortunes will continue to be made and lost.


  1. I'm not quite getting the Crypto = HFCL analogy.

    If all the slots in a (virtual?) Chain Letter were created and sold at a single point in time slots that received payments earlier would be worth more than slots where the payment was later. Slots where the payment was felt to be unlikely to made at all would have zero value. The value of slots could to some extent be estimated based on likely return.

    I'm not sure how this maps on to crypto. Here 'slots' are created over time but all existent slots have the same value. This value varies based not on expected return but simple (as far as I can see) based on expected future value (and expected future value will itself be based on expected future value in the future - a concept that makes my brain seek alcoholic relief!).

    Chain letters appear to me to be to be easily explainable as Ponzi schemes. They are objectively unsustainable but the value of an early slot in line could clearly still have value. I'm not seeing crypto as an obvious Ponzi scheme. People buy crypto based on expected future value and (I doubt it - but who knows) if a specific crypto eventually becomes the world medium of exchange then those who HODLed it will be rich for the same reason that early HODLers of Amazon or Apple are now rich.

    Probably just missing the driver behind the analogy - love the blog !

    1. You're being polite by saying you don't get the analogy.

      The analogy is one of the most ignorant things I've ever read, and I've been on the internet since 1994.

    2. Rob: "I'm not sure how this maps on to crypto. Here 'slots' are created over time but all existent slots have the same value."

      Yep. I mentioned this in passing in my post, but it's an important point. Instead of being hierarchical, all spots in the Dogecoin list are "equal, or fungible."

      That's one of the big upgrades that Dogecoin brings to the old fashioned chain letter model. Not only does it create all list entries at once, but it also removes the classic tiered relationship between slots. (And it does this while preserving decentralization.)

      Dogecoin is still tiered, but the tiering has been relocated. It's no longer built into the relationship between slots, with slots higher in the chain dominating lower ones. Tiering is now a function of how early (or late) one buys a pre-existing fungible spot in line. As in any chain letter, those who get into the list early are paid by latecomers.

      So to sum up, Dogecoin and your parent's chain letter are both lists. Each list has different rules. But either way, the earliest to get a spot wins.

      Lou: if you don't have anything of value to contribute, please desist from commenting.

    3. So in summary:

      - Both HFCL and Crypto are similar in that they are lists and are setup so that early-comers are more likely to make money than late-comers.

      - They are different in that Crypto has used blockchain technology to move from a hierarchical to a flat list structure which means that all elements in a crypto list have the same value.

      Does that sound right ? If so, I'm still not fully convinced (It still feels like the fact that a slot in a HFCL might really bring in some income to the holder in a way that a cryto unit never will unless its sold is a very significant difference) but thanks for the clarifications!

    4. At what point can you admit your analogy breaks down?

      Expensive Whiskey and Bitcoin are more similar than bitcoin and chain letters.
      I can make an argument that even Apples and Bitcoin are more similar.

      Bitcoin functions more as a commodity than a Ponzi scheme. Making a crypto comparison to chain letters might be interesting if you limited it to simply the way people promote them, but trying to say that chain letters are some kind of historical precedent to crypto is asinine because someone with a modecum of intellect is able to understand the very credible differentiation between something that IS A PONZI and something that is NOT A PONZI.

    5. Perhaps as money flows up in a chain letter hierarchy this is functionally equivalent to the sale of a slot in a crypto flat list ? (One all the money has flowed up to a specific slot in a chain letter that slot is in effect eliminated).

    6. Rob: I think you've answered your own comment. Yes, money flowing up an old fashioned chain letter and a sale of Dogecoin are functionally equivalent.

      In old fashioned hierarchical chain letters, money flowed up the chain as late players added their name to the list and sent dollars to slots owned by earlier players. With Dogecoin, late players also pay off early players, but they make the payoff a bit differently: by directly buying slots owned by earlier players (and/or bidding the price of slots higher.) Either way it's the same mechanism.

      Lou: Bitcoin is not a commodity because it can't be used up or consumed. Copper, for instance, is a useful building product.

    7. Saying bitcoin is not a commodity because it can't be used up or consumed is equivalent to me saying that bitcoin is not like a chain letter because it's not made out of paper. JP are you saying bitcoin is made out of paper?

    8. "money flowing up an old fashioned chain letter and a sale of Dogecoin are functionally equivalent." No, they are not because anyone who has purchased Dogecoin could have sold at anytime meaning they are not benefiting in anyway by new entrants, they may have also lost money by having bought high and selling low and never to return.

      Chain letters offer nothing helpful to understanding cryptocurrency and your insistence on this comparison is triggering, referring to 'slots' which literally do not exist in crypto is making my blood boil.

    9. OK, you have got me 90% convinced.

    10. Rob: Good to hear.

      Lou: There's a simple test for whether something is a commodity or not. Imagine that there was a rule that people couldn't resell copper to other investors/speculators after buying it. People would still purchase some copper anyway to use for building stuff, electronics, etc. But if Bitcoin or Dogecoin resale was likewise prohibited, no one would ever buy them in the first place. Because they can't be used as commodities.

    11. Wrong, google the words 'bitcoin commodity'
      The first result confirms it, there is a link to 'Bitcoin Basics' stating precisely that the CEA (Commodities Exchange Act) and Commodity Futures Exchange Commission consider bitcoin a commodity.

      'Bitcoin basics' meaning, this circular is supposed to help educate people to the most fundamental aspect of understanding bitcoin, which is that it is a commodity.

    12. Bitcoin is certainly not made of paper, and no legal authority anywhere has defined Bitcoin as a piece of paper, so your claim that Bitcoin is like a piece of paper is wrong!

  2. The main usefulness of your analogy is for you to relieve yourself of any regret for not buying bitcoin when you could have by comparing it to an apparent scam.

    It's the equivalent of willful ignorance, or intentional misdirection.

  3. This blog is so useless. The main reason it pumped was because Elon talked about it. Just get any billionaire to talk about any coin that will pump in a matter of days.

    1. Your history is off, anon.

      Dogecoin's success began far before Elon seized on it. Elon talked about Dogecoin *because* it was already famous.