This underdog cryptocurrency could struggle to stay relevant.
Bitcoin‘s (BTC -0.55%) price surged about 60% over the past 12 months and trades about 7% below its all-time high. That rally was driven by an inflow of cash into its spot price ETFs, which started trading last year; more corporate and institutional purchases, and the Trump administration’s crypto-friendly stance and establishment of a Strategic Bitcoin Reserve. Bitcoin could also be gaining more traction as a hedge against inflation, geopolitical conflicts, and other macro headwinds, while expectations for lower interest rates are driving investors toward the crypto market again.
Yet many of the smaller cryptocurrencies were left behind and underperformed Bitcoin. One of those tokens was Solana (SOL -1.11%), which only rose about 7% over the past 12 months and remains more than 50% below its all-time high. Let’s see why Solana slipped — and if it might be a better long-term investment than Bitcoin at these levels.
Image source: Getty Images.
The differences between Solana and Bitcoin
Solana, like Ether (ETH -2.57%), is staked on its blockchain (locked up for interest-like rewards) instead of mined. That proof of stake (PoS) mechanism consumes a lot less power than the proof of work (PoW) mechanism used to mine Bitcoin. PoS blockchains also support smart contracts, which are used to develop decentralized apps (dApps), games, non-fungible tokens (NFTs), and other crypto assets. PoW blockchains are only used for mining tokens and don’t support those developer-oriented features.
Therefore, Solana and other PoS tokens are often valued by the speed of their transactions and the growth of their developer ecosystems instead of the scarcity of their tokens. Moreover, Solana is an inflationary token with no maximum supply. Nearly 528 million Solana tokens are currently in circulation, but it’s reducing its annual inflation rate (currently at 4.5%) by 15% every “epoch year” (450 days to 630 days) until it reaches an annual inflation rate of 1.5%. Bitcoin is a deflationary cryptocurrency with a maximum supply of 21 million tokens, 19.9 million of which have already been mined. That scarcity makes Bitcoin more comparable to gold, silver, and other physical commodities.
The differences between Solana and other PoS tokens
Many PoS tokens were built on Ethereum’s blockchain, but Solana has its own native PoS blockchain. Solana also upgraded that PoS blockchain with its proprietary proof-of-history (PoH) mechanism, which enables it to process transactions at a faster rate than Ethereum.
Solana has a theoretical maximum speed of 65,000 transactions per second (TPS), compared to a theoretical max speed for 30 TPS for Ethereum’s main Level 1 transactions. But for real world transactions, which face network congestion and other limitations, Solana has a daily average speed of 600 to 1,500 TPS, while Ethereum has an average Level 1 speed of 15 TPS. However, other Level 2 solutions which are built on top of Ethereum and process the transactions off-chain can achieve much higher real-world speeds of 1,000 to 4,000 TPS. Rollups, which bundle together multiple transactions off-chain to be processed together, are the most common type of Level 2 solutions on Ethereum.
So while Solana is the fastest PoS blockchain, it’s still less popular than Ethereum because its ecosystem is smaller, it’s not cross-compatible with other blockchains, and its main developer languages (Rust and C) have steeper learning curves than Ethereum’s Solidity. Solana also had more network congestion and outage issues than Ethereum.
What are Solana’s main catalysts?
Those challenges caused Solana to underperform Bitcoin over the past year. But looking ahead, a few catalysts could elevate its profile and drive its price higher. Visa, Shopify, and other companies have integrated Solana Pay into their platforms to process instant and near-free stablecoin transactions. Meanwhile, more developers are launching games on Solana which use in-game NFTs, tokens, and other crypto collectibles.
Some developers are also launching new decentralized projects — like wireless networks, GPU sharing, and decentralized real-world maps — on Solana’s blockchain. New network upgrades should reduce its congestion and improve its scalability.
Last but not least, several crypto firms recently submitted their applications for Solana ETFs. It’s unclear if the Securities and Exchange Commission (SEC) will actually approve those new funds, but they could help Solana attract a lot more attention from institutional investors.
But is Solana a viable alternative to Bitcoin?
Solana’s speed and growth potential make it a more promising investment than many of the other “meme coins.” That said, I don’t think it’s a better crypto investment than Bitcoin for three simple reasons: It’s inflationary, it faces lots of competition from Ethereum’s L2 solutions, and it isn’t cross-compatible with other blockchains like Ethereum.
Leo Sun has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bitcoin, Ethereum, Shopify, Solana, and Visa. The Motley Fool has a disclosure policy.
