Blockchain
After Bitcoin Halving, Is Solana a Sensible Buy?
This hot cryptocurrency could outperform Bitcoin in the coming years.
Bitcoin (BTC -3.84%) has gone through four “halvings,” which cut the cryptocurrency’s mining rewards in half, every four years since 2012. Bulls see those events as major catalysts for Bitcoin because they tighten its supply.
Bitcoin’s price surged 109% in the 12 months leading up to its latest halving on April 19. That rally, boosted by hopes for lower interest rates and approvals of the first spot-priced Bitcoin ETFs this January, has also lifted other cryptocurrencies.
Image source: Getty Images.
Yet the price of Bitcoin has fallen about 2% since that fateful day. That pullback suggests that many investors bought Bitcoin ahead of its halving, but the lack of additional catalysts could prevent new investors from jumping in.
So, instead of focusing too much on Bitcoin right now, investors should pay more attention to other smaller cryptocurrencies that have generated bigger gains. One such token is Solana (SOL -5.32%), which rose 472% in the 12 months before Bitcoin’s halving and has gained another 8% in the months since. Is it a discounted buy right now?
The Difference Between Bitcoin and Solana
Bitcoin is mined with an older, more energy-intensive proof-of-work (War possession) method, while Ether (ETH -3.79%), Solana and other newer cryptocurrencies are mined with the fastest and most energy-efficient proof of stake (Shop) method.
Blockchain PoS support smart contractswhich can be used to develop decentralized apps (dApp), games, non-fungible tokens (NFT), and other cryptocurrencies. PoS tokens can also be “staked” (locked) on the blockchain for a period of time to earn rewards. PoW blockchains are only used natively to directly mine cryptocurrencies.
Simply put, PoW tokens are valued based on their scarcity, while PoS tokens are valued based on the growth of their ecosystems. This is why cryptocurrency investors generally favor PoS blockchains, which have the fastest transaction speeds and lowest fees.
Why are investors so excited about Solana?
Solana is the fastest PoS blockchain in the world. It is based on the same PoS technology as Ethereum, but speeds up the process with its proof of history (PoH) method. This upgrade allows Solana to process transactions 46 times faster than Ethereum and five times faster than its nearest competitor Polygon (MATIC -3.45%). However, Solana has only reached about 1.6% of its theoretical maximum speed, so it could significantly widen its lead over Ethereum, Polygon, and other PoS blockchains.
Solana’s speed is driving the rapid expansion of its ecosystem. It has been used to develop decentralized exchanges like Jupiter and Orca, as well as popular meme coins Pleases DISGUST AND Wife. It helps Visa (NYSE:V), Payment via PayPal (NASDAQ: PYPL) and Circle settle their stablecoin transactions and have integrated their Solana Pay payment protocol into Shop(NYSE: SHOP) e-commerce services. Solana even launched its own Android smartphone for Web3 Applicationsthe Saga Phone, last year. It’s still a niche device, but it has its own dApps Store as an alternative to AlphabetGoogle Play Store. This ongoing expansion should stabilize and increase the value of Solana’s native cryptocurrency in the coming years.
Can Solana overcome short-term challenges?
Solana has faced three major headwinds over the past two years. First, it suffered a series of network congestion and security breaches while handling an increasing number of spam transactions. Second, the failed cryptocurrency exchange FTX, which had been one of Solana’s biggest backers, hastily liquidated its tokens at a discount to repay its creditors. Finally, rising interest rates have driven investors away from Solana and other speculative cryptocurrencies.
But looking ahead, most of these headwinds should dissipate. Solana developers are trying to address its congestion and security issues with new updates, and FTX finally completed its $2.6 billion Solana token sale at a discount in May. If interest rates stabilize and decline over the next few quarters, the cryptocurrency market should heat up again.
So is it the right time to buy Solana?
Solana, like many other cryptocurrencies, seemed to have lost its luster after the Bitcoin spot price ETF approvals and halving earlier this year. However, I believe that complacency has created a great buying opportunity in promising tokens like Solana, which has clear long-term advantages over Bitcoin, Ether, and other PoS tokens.
Suzanne Frey, an executive at Alphabet, is a member of the board of directors of The Motley Fool. Sun Leo has no positions in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Bitcoin, Ethereum, PayPal, Polygon, Shopify, Solana, and Visa. The Motley Fool recommends the following options: short June 2024 $67.50 call on PayPal. The Motley Fool has a disclosure policy.