Elon Musk is being sued, it has been revealed, for a whopping $258bn over allegations that he ran a pyramid scheme to promote Dogecoin.
The digital asset, also known as DOGE, which was launched as a joke cryptocurrency in 2013 to poke fun at the rise of established digital assets such as Bitcoin, hit the headlines last year after surging exponentially.
Over a period of four months, Dogecoin jumped from $0.004 to $0.73 – an 18,000% gain.
In this time frame, Musk regularly tweeted about DOGE, and on the day it began to go down in value, he talked about it on the primetime US comedy show Saturday Night Live.
Dogecoin has fallen sharply over the past year, and is currently about 92% off from last May’s record high.
Now, the world’s richest man – alongside Tesla and SpaceX, the companies he is CEO of – are being accused of “promoting Dogecoin to profit from its trading.”
A filed legal complaint in a New York court reads: “Musk used his pedestal as the world’s richest man to operate and manipulate the Dogecoin pyramid scheme for profit, exposure and amusement.”
He’s being sued by a private US citizen – Keith Johnson – who claims he was “defrauded out of money” as a result of the billionaire’s endorsements.
The whole situation is depressingly predictable, I’m afraid.
It was inevitable, as I warned in public last year on several occasions, that many novice retail investors would get burned in the Dogecoin frenzy.
The fallout underlines two key things.
First, investors should avoid being drawn into the hysteria driven by social media and ‘activist’ investors.
The Doge pump was pitched as a Daniel and Goliath-esque battle, with Dogecoin in a valiant fight to topple well-established crypto giants like Bitcoin.
But this is not typically the way reasoned, savvy investors should strategise to create and build their portfolios in order to reach their financial goals.
If you do want the thrill of going after unbelievable (18,000%-style unbelievable) gains, fuelled by interest and hype by activists on social media, you better ensure that you have a proper, diversified, long-term financial strategy first as back-up.
Second, do your due diligence on the cryptocurrency before investing – not all cryptos are created equal.
Speak to an adviser and also do your own research to understand how the crypto works and its history before deciding on which to participate in. Things you should be looking at are, the purpose of the cryptocurrency, how long it has been in the market, market capitalisation and its underlying solutions.
Cryptocurrencies that solve problems are likely to succeed more than those that do not, the longer a cryptocurrency has been in the market the more trust it has attained and cryptocurrencies that are developed on strong networks will stand longer.
For example, it’s very hard to equate a dog meme like Dogecoin with the likes of Bitcoin, which runs on ground-breaking tech and has a limited supply giving it scarcity value, amongst other valuable attributes.
And Ethereum, which is solving real world issues and providing in-demand business solutions. For these reasons, amongst others, they are attracting huge institutional investment.
Investing is becoming increasingly democratised thanks to the likes of Elon Musk, amongst others. This is a good thing.
But the massively influential leaders of this social media age must exercise responsibility and investors must exercise caution.