Speculative Bubbles and Behavioral Economics: The Rise of Dogecoin

Introduction

Speculative bubbles have long captivated economists, because they can drive asset prices well above what fundamentals would suggest. From Tulip Mania in the 17th century to the 1990s dot-com boom, history is filled with examples of an asset’s value going berserk largely on the basis of giddy investor sentiment. The cryptocurrency market has been rich soil for studies of such things in recent years, and few digital assets show so strongly the characteristics of a speculative bubble as Dogecoin. Dogecoin, which was literally a joke that launched in 2013, had experienced price spikes in 2021, all made possible through viral internet culture, celebrity endorsements, and meme dynamics, rather than any type of fundamentals. Some important part of behavioral economics—psychological biases herd behavior and informed cascades—are concepts that contribute to elucidation on Dogecoin, and are the focus of this article.

Defining a Speculative Bubble

A speculative bubble occurs when the price of an asset is significantly higher than its intrinsic value and is being driven more and more by investors’ hopes that the price will continue to rise rather than by fundamentals. From the point of view of Manias, Panics and Crashes, the classic by Charles Kindleberger, bubbles are almost always driven by easy credit, irrational exuberance, and the collective psychology.

With cases like Dogecoin, traditional valuation metrics are pretty much useless. It has no maximum supply, very few use cases, and was never designed to have any real financial value. But its market capitalization soared past $80 billion at its peak—a price point that couldn’t be explained with traditional, financial models.

Behavioral Economics and Investor Psychology

Behavioral economics offers a more subtle framework for explaining such behavior. Academics like Robert Shiller and Daniel Kahneman have demonstrated that the markets don’t work perfectly, that people make terrible mistakes when they buy and sell, often swaying decisions through cognitive biases and emotional impulses.

Key Psychological Drivers:

·       Herd Behavior: Investors usually follow the actions of others, believing the crowd must know more than them. On platforms such as Reddit and Twitter, a community-wide excitement for Dogecoin intensified the buying pressure and reinforced the image of a must-buy asset.

·       FOMO (Fear of Missing Out): Another reason these prices shot up so quickly are retail investors who saw the prices of Doge skyrocket and rushed in to avoid being left behind (again ignoring risk/research).

·       Overconfidence Bias: Some investors believed that they could time the market or get out before a market crash, underestimating the difficulty (in terms of speed and timing) of pulling this off in volatile conditions.

·       Narrative Economics: Some stories resonate and influence economic behavior, a phrase coined by Shiller. The “rags to riches” narrative of dogecoin, courtesy of endorsements from celebrities (including, prominently, Elon Musk), also played an important role in demand.

Empirical Evidence: Price vs. Social Attention

To show the connection between social interest and price action, check the following graph that compares Google Trends interest for “Dogecoin” with its past price at the 2021 peak.

The close relationship between search volume and the price spike of Dogecoin—especially during the April–May 2021 bubble is— shown in the graph. This indicates that the price movements were primarily sentiment-driven rather than value-driven.

Tools of the Speculative Era: The Role of Real-Time Valuation

When it came to the sudden spike in Dogecoin, for example, retail investors relied on easy-to-use, accessible tools to record value, returns and conversions. One such resource is the Doge calculator which enables users to track the current exchanges between Dogecoin or fiat currencies in real-time. Primitive though it was, such tools became central to retail trading strategies, allowing for continuous engagement with price fluctuations at any given moment and, all-too-often, further entrenching emotionally motivated decision-making.

Rational Inattention: A Challenge to Information Cascades

One important but less often mentioned feature of speculative bubbles is rational inattention. Simply put, many retail investors do not have the time or expertise to understand 
a) how blockchain mechanics work, 
b) the nuances of tokenomics, or 
c) the impacts of economic policies. 

They have learned to depend on simplified signals—social media posts, or price momentum, for example—for guidance in decision making. This creates information cascades, where information given to some people influences others, intensifying irrational behavior.

For Dogecoin, online forums served as potent echo chambers. Once the momentum was created, each new buyer validated the last one’s decision, and the hype snowballed into a self-reinforcing loop—the classic dynamics of a bubble.

Bursting the Bubble: A Behavioral Outcome

Dogecoin’s price eventually plummeted after peaking in May 2021, washing away more than 80 percent of its market value in the months that followed. This crash was equally emotional in nature, characterized by panic selling, disillusionment, and “buyer’s remorse.” This phase of investor behavior can be explained by behavioral economics in terms of loss aversion (the pain of loss is greater than the pleasure of gain) and confirmation bias, as investors only looked for news that supported their original posture until reality became inescapable.

Conclusion

The history of Dogecoin’s boom and bust is a textbook example of a speculative bubble driven by psychological and social factors. Traditional economic models fail to capture the erratic exuberance that propelled its rise, however, behavioral economics provides a convincing explanatory lens. From herd behavior to narrative-driven investing, Dogecoin’s tale is not about fundamental value; it’s a mass psychology story, a tale of the digital age.

The presence of tools like the Doge calculator did surprisingly well to keep investors engaged, showing how easy-to-access frameworks can amplify speculative actions in decentralized financial ecosystems.

As the crypto space progresses, economists will have to increasingly mix classical theory with behavioral insights to get a full picture—and maybe even anticipate—the next digital bubble.