Despite Speed Advantage, Tread Carefully With Solana

Increased buzz in early June gave Solana (CCC:SOL-USD) a short-lived boost. But it’s pulled back since then from a peak of $44.10 to around $34 per token. This is due to some extent to uncertainty in the crypto market’s ability to bounce back.

A high contrast neon concept image for the Solana blockchain
Source: Shutterstock

It’s still hard to tell whether things will soon pick up once again or if last month’s meltdown in digital asset prices is the start of a multi-year bear market, similar to the one that played out following the crypto bust of 2018.

It may take time for this altcoin to rally once again. But, you may still want to keep SOL on your radar. Why? As you may know, there are scores of up-and-coming cryptocurrencies with high utility. Each of them is trying to grab a piece of Ethereum’s (CCC:ETH-USD) commanding share of the DeFi (decentralized finance) economy.

Also known as “Ethereum killers,” this category includes names such as Cardano (CCC:ADA-USD) and Polygon (CCC:MATIC-USD). So far, Cardano seems to be the front-runner. But Solana’s advantage in one key area — transaction speed — could give it an edge. In other words, consider it the dark horse contender that could pull off an upset.

Keep in mind, though, that this token’s blockchain is still in its early stage. A recent capital raise (more on that later) may turbocharge its growth. But forthcoming upgrades among the other altcoins may make its current transaction speed numbers sound less impressive over time. Add in the risk that altcoins have yet to bottom out, and it may be best to take a cautious approach.

Speed May Give Dark Horse Solana The Edge

The crypto that kicked off this asset class, Bitcoin (CCC:BTC-USD) may still be the most valuable one by market capitalization. But, when it comes to utility, it’s lacking in many areas. That’s why Ethereum, with its faster transaction speeds and smart contract capabilities, has become the one most widely used in DeFi.

It’s also why many believe its coin, ETH, will eventually supplant BTC, in terms of total value. But with the emergence of the aforementioned altcoins, it may be tough for it to achieve this. Instead, its price could fail to rise much further as the other DeFi-centric blockchains beat it, in terms of scalability, speed and transaction fees.

Various factors point to Cardano or Polygon being the one that disrupts Ethereum’s lead. Yet Solana has a shot at becoming the frontrunner thanks to its current speed advantage. Using a timing mechanism called proof of history, its blockchain is able to process more than 50,000 transactions per second.

Currently, that’s thousands of times more the current transaction speeds of Bitcoin and Ethereum. But before you run out and buy it on its speed figures alone, there are some caveats. For one, it’s still in its early stages. Also, rival blockchains may be set to increase their transaction speeds. Solana shows promise, but it’s still far away from giving the current leader and rival contenders a run for their money.

A Long Road For This ‘Ethereum Killer’

In early June, the Solana Labs development team completed an offering of SOL tokens, raising $314 million from investors, including established Silicon Valley venture capital firm Andreessen Horowitz. The proceeds from this capital raise will go towards further upgrading its platform.

Solana may have a speed advantage now. But as seen from the pending upgrades among its rivals, it’s going to need to continue leveling up in speed and in other areas in order to keep up. The rival blockchains aren’t going to rest on their laurels and let this one gain the advantage thanks to turbo-charged speeds.

For example, Cardano’s Hydra scaling solution could theoretically enable transaction speeds of over 1 million transactions per second. Even Ethereum itself could be soon set to see its transaction speed increase in a big way. Its co-founder, Vitalik Buterin, claims that its 2.0 upgrades could eventually enable it to process up to 100,000 transactions per second.

Putting it simply, it’s too early to say Solana will leave ETH and its would-be “killers” in the dust. Instead, this recently buzzed-about name could be the one that falls behind.

Bottom Line: Approach Cautiously

Given the uncertainty still looming over crypto, you may want to ease into SOL-USD instead of diving in all at once. Even though it’s still down big from its pre-meltdown highs ($58.30), at today’s prices it’s still far above the single-digit levels it traded for as recently as January.

If it’s an extended crypto bear market, it may still be far from hitting its price floor. Add in the uncertainty as to whether it will maintain its speed edge, and it looks best to wait and see with Solana.

On the date of publication, Thomas Niel held long positions in Bitcoin and Ethereum. He did not have (either directly or indirectly) any positions in any other securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Thomas Niel, contributor for InvestorPlace.com, has been writing single-stock analysis for web-based publications since 2016.


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