Dogecoin Trading Strategy — What Is It? (Backtest)
Last Updated on April 18, 2023
Although it started as a joke, the crypto world gradually developed an obsession for Dogecoin, making it one of the most talked-about cryptos in 2020 and 2021. But what is Dogecoin?
Dogecoin (DOGE) is a peer-to-peer, open-source cryptocurrency that was created as a lighthearted alternative to traditional cryptocurrencies like Bitcoin. Considered a meme coin, it started as something of a joke, but it quickly grew to become one of the top cryptocurrencies.
In this post, we take a look at Dogecoin and we present a Dogecoin trading strategy.
What is Dogecoin?
Dogecoin (DOGE) is a peer-to-peer, open-source cryptocurrency that was created as a lighthearted alternative to traditional cryptocurrencies like Bitcoin which provides its users a completely unknown, decentralized, and secure environment that is free from any third-party interference when it comes to transactions.
Considered a meme coin, it started as something of a joke and has the image of a Shiba Inu dog as its logo. However, it quickly grew to become one of the top cryptocurrencies due to its large, loyal community of supporters who trade it and use it as a tipping currency for social media content. By late 2017, it was a part of the cryptocurrency bubble that sent the values of many coins up. Since then, it has been part of the crypto bull and bear cycles.
Despite being seen as a joke, the Dogecoin blockchain has merit, with its underlying technology being based on Litecoin. It uses the same proof-of-work technology. Proof of Work (PoW) forms the basis of many cryptocurrencies, allowing for secure, decentralized consensus.
Dogecoin uses a scrypt algorithm, and some of its notable features are its unlimited supply and low price. Users can buy and sell Dogecoin on digital currency exchanges, and they can opt to store their Dogecoin on an exchange or in a Dogecoin wallet.
When was it created?
Dogecoin was created by Jackson Palmer and Billy Markus in 2013 as a way to satirize the hype surrounding cryptocurrencies. The idea came from Palmer, a product manager at the Sydney, Australia, office of Adobe Inc. A “skeptic-analytic” observer of the emerging technology, Palmer’s initial tweets about his new cryptocurrency venture were posted tongue-in-cheek. But after getting positive feedback on social media, he bought the domain dogecoin.com.
Following the Dogecoin buzz on Twitter, Markus, a software developer at IBM who wanted to create a digital currency, reached out to Palmer to get permission to build the software behind an actual Dogecoin. He based Dogecoin’s code on Litecoin’s script technology, which makes it a Proof-of-Work (PoW) coin. Palmer and Markus launched the coin on Dec. 6, 2013. Dogecoin initially used a randomized reward for block mining, but that was changed to a static reward in March 2014.
How many Dogecoins are created every year?
Unlike cryptocurrencies like Bitcoin, which are deflationary because there’s a ceiling on the number of coins that will be created, Dogecoin is an “inflationary coin”, with new coins being created by the minute.
Dogecoin started with a supply limit of 100 billion coins, and by mid-2015, the 100 billionth Dogecoin had been mined, which was far more coins than the top digital currencies were allowing. Since then, an additional 5 billion coins are put into circulation every year. This translates to 10,000 more Dogecoin being issued every minute and nearly 15 million coins per day
Although there is no supply limit theoretically, at this rate, the number of Dogecoins put into circulation will double in 20 years and the next doubling will occur in the year 2075. So, there is no implemented hard cap on the total supply of Dogecoins.
In February 2014, Dogecoin founder Jackson Palmer announced that the limit is removed so as to create a consistent reduction of its inflation rate over time. What this means is that the inflation rate would improve over time, starting at 5% in 2015 and reducing to less than 4% in 2019; it would be 3% by 2027, and 2% by 2035.
Is Dogecoin a meme coin?
Yes, Dogecoin is a meme coin. Meme coins are cryptocurrencies inspired by memes and internet jokes. A meme is a humorous image, video, or piece of text that is copied, usually with slight variations, and spread rapidly by internet users. Both Dogecoin’s creation and logo fit that description.
The cryptocurrency community loves memes, and Dogecoin is the first and one of the favorite meme coins. Dogecoin’s brand logo is based on a popular meme of that time that featured a Shibu Inu dog, and it also has colorful fonts that add to its appeal.
Dogecoin trading strategy (backtest and example)
Let’s first start with a visual chart of the price action in Dogecoin since 2017:
As you can see, the price movement is all over the place! When you have price action that looks like this, and additionally only have a few years of history, it goes without saying that it’s difficult to find any consistent Dogecoin trading strategy. This is a market driven by FOMO (what does FOMO mean in trading?), greed, and fear. Also, keep in mind that the right axis is logarithmic (what is log scale chart?).
Dogecoin trading strategy
We are not trading Dogecoin ourselves, but let’s see how a classical breakout strategy might perform in Dogecoin.
The table below is done in Amibroker and is based on strategy optimization (click here for how to optimize a trading strategy).
We backtest the following Dogecoin breakout trading strategy:
- We go long at the close when the close crosses above the highest N-day close (N-days lookback period from 5 to 100 days with 5-day intervals).
- We sell at the close when the close crosses below the lowest N-day close (N-days lookback period from 5 to 100 days with 5-day intervals).
The results are summarized in the table below:
The first column shows the number of days in the lookback period. For example, the first row shows the strategy performance metrics for the 5-day lookback period (when the close crosses above the highest close over the last 5 days).
The 4th column shows a few strategies with a high profit factor (what is a good profit factor?). Let’s look at the equity curve by using a 80-day breakout strategy (what is a good equity curve?):
There are only 7 trades and the best trade has a profit of 4800%. Not much to rely on!
Please also check out our Bitcoin and Crypto Guide and cryptocurrency trading strategy.
Other trading strategies
We prefer to trade other types of assets than Dogecoin – primarily stocks and futures. We have a wide range of products in our trading strategy shop in addition to lots of free profitable trading strategies.
Dogecoin trading strategy – ending remarks
The rise and fall of Dogecoin is mainly a result of a massive speculation frenzy. Thus, we think it’s mostly a waste of time looking for robust Dogecoin trading strategies because any trading strategy will most likely fail any out of sample backtest. We believe you are better off focusing on bitcoin trading strategies if you want to delve into cryptocurrencies.