Is Dogecoin a Pyramid Scheme? Investor Suing Elon Musk Says Yes

A scorned Dogecoin (DOGE) cryptocurrency investor has filed a lawsuit against Tesla and SpaceX founder Elon Musk.

Musk sparked the DOGE revolution through his Twitter in 2019, but the current crypto bear market has left many investors penniless. The lawsuit’s plaintiff claims Dogecoin is a pyramid scheme and Musk holds responsibility for popularizing it.

A plaintiff named Keith Johnson filed a lawsuit in Manhattan federal court on Wednesday, June 15 against Musk and his companies, Tesla and SpaceX. The lawsuit, worth $258 billion, alleges Musk backed a pyramid scheme by supporting and popularizing Dogecoin. Johnson says Musk broke fraud, racketeering, and gambling laws in doing so.

The lawsuit states, “Dogecoin is not a currency, stock, or security. It’s not backed by gold, other precious metal, or anything at all. You can’t eat it, grow it, or wear it. Dogecoin does not generate cash flow. It doesn’t pay interest or a dividend. It has no unique utility.” The suit continues that Dogecoin has no value in numerous other scenarios, and Musk and his companies are at fault for buying into it and convincing others to do the same.

Billy Markus and Jackson Palmer created Dogecoin as a joke in 2013. Since then, Musk has dubbed himself the “Dogefather” and tweeted about the token numerous times, using his influence to convince others to take it to the moon. Tesla has enabled Dogecoin purchases, and limited other companies accept DOGE as payment (including meme stocks AMC Theaters and GameStop).

Musk’s alleged responsibility for pushing DOGE is one thing, but Dogecoin’s structure as a potential pyramid scheme is another.

The lawsuit refers to New York Attorney General Letitia James, who defined a pyramid scheme as “a fraudulent system of making money based on recruiting an ever-increasing number of ‘investors.’”

The lawsuit continues that Dogecoin is a crypto pyramid scheme because it has no intrinsic or underlying value, is “not a productive asset,” has an unlimited number of tokens, and its value is “solely derived from the hope that the price will rise indefinitely under the ‘greater fool theory.’” Johnson also alleges Musk and his companies directly control and manipulate the DOGE market, spelling out a history of tweets, statements, and appearances in which Musk has promoted the cryptocurrency.

As for whether Dogecoin is a pyramid scheme, it’s definitely possible. Any unbacked security or pump-and-dump (including those in crypto and the stock market) operate similarly to pyramid schemes. The plaintiffs will have to analyze trading behavior on the blockchain, particularly from whales, to make a case. However, this sort of lawsuit is unprecedented and could be difficult to win.

In May, Terra’s stablecoins (LUNA and UST) depegged from the U.S. dollar, which they're supposed to track. The tokens never recovered after the crash and billionaire Bill Ackman called Terra, an algorithmic stablecoin not secured by any fiat currency, a pyramid scheme.

Ackman likened Terra to a pyramid scheme, tweeting, “Investors were promised 20 [percent] returns backed by a token whose value is driven only by demand from new investors in the token. There is no fundamental underlying business.”

Now, critics are calling Dogecoin a pyramid scheme, too. Crypto remains a regulatory gray area and investors will have to wait and see what the courts determine — and whether they say Musk bears responsibility for pumping DOGE.