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Solana: Bull vs. Bear

By Keith Speights and Adria Cimino – Dec 10, 2021 at 5:55AM

Key Points

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Here's a look at both sides of the digital coin.

Solana (SOL -2.00%) has been a huge winner over the last 12 months. The cryptocurrency is up more than 11,400%. An initial investment of $1,000 in December 2020 would now be worth over $115,000. 

But -- as you've no doubt heard many times before -- past success is no guarantee of future performance. There's plenty of disagreement on how Solana will perform going forward. Here are the bull and bear cases for the high-flying digital coin.

Digital images of a bear and a bull over a person looking at a laptop with a city at night and stock prices in the background.

Image source: Getty Images.

Bullish take: Momentum that could accelerate

Keith Speights: Here's a cryptocurrency trivia question for you: What's the fastest-growing blockchain in the world? It's not Bitcoin, Ethereum (ETH 1.96%), or any of the ones with dogs on their logos. Solana has the most momentum in the crypto universe. I think that momentum could accelerate. 

Solana now ranks as the fifth-most popular cryptocurrency on the market. Its rapid rise is a direct result of the blockchain's blazing speed. Solana is capable of processing close to 50,000 transactions per second. But its low costs are a major plus as well. The average cost per transaction is only $0.00025.

Seven Seven Six, a venture capital fund formed by Reddit co-founder Alexis Ohanian, and the Solana Foundation plan to invest $100 million in developing what Ohanian calls "the next wave" of social media on Solana. This is the kind of investment that seems likely to attract even more development on the blockchain. 

Bearish take: Still lagging behind Ethereum

Adria Cimino: Solana has indeed burst onto the scene as a significant player in the cryptocurrency market. It's climbed its way up the market cap and performance ladder. But there still are plenty of reasons to proceed with caution if you plan on investing in Solana. First, Solana's pace of growth over the last year can't continue forever. And with the number of crypto players out there, investors have a vast selection. Investors may drop out of this year's biggest gainers and place bets on up-and-coming players that haven't yet increased by very much.

Another area of concern is Solana's number of projects versus bigger rival Ethereum. Solana is the basis for more than 350 projects including decentralized finance applications, games, and non-fungible tokens (NFTs). That's great. But it's still way behind Ethereum. The world's second-biggest crypto features nearly 3,000 projects, according to the State of the d'Apps website. And in sales of NFTs, Solana remains behind Ethereum, too. Ethereum is first in all-time NFT sales volume, while Solana takes the fourth spot, according to CryptoSlam. Ethereum already has the first-to-market advantage. And it's about to launch an upgrade next year that will make its platform faster and more efficient. That may make it difficult for Solana to catch up.

Finally, another point to be aware of is the potential for instability on the Solana network. Back in September, Solana experienced such an event. The platform reported "intermittent instability," according to the Solana Foundation. A sharp increase in transactions overwhelmed the processing queue -- as a result some parts of the network went offline. It's important to remember that Solana's blockchain still is in the beta stage. So, we may face more growing pains as this young crypto continues along its development path.

Bridging the divide

So which perspective of Solana is right? Maybe both. The bull and bear views about this cryptocurrency actually aren't as far apart as you might think.

It's quite possible that the adoption of the Solana blockchain could pick up momentum. Even if that happens, though, the digital coin's price isn't likely to skyrocket as much as it has over the past year. But that doesn't mean Solana couldn't still deliver impressive gains in 2022 and beyond.

The bearish argument that Solana probably won't catch up with Ethereum could be spot on. However, that doesn't rule out the prospects of Solana gaining ground on the more popular blockchain platform. Both cryptocurrencies could perform well going forward.

What about Solana's instability experienced in September? Investors should be aware of these kinds of risks. Of course, issues could occur with any blockchain -- especially when major changes are made such as the upgrade scheduled for Ethereum next year.

The bottom line is that Solana is risky (like all other cryptocurrencies). It could underperform other digital coins -- or outperform them. No one knows for sure what the future holds for Solana. That's why it's important for investors to evaluate the bull and bear cases for the platform.

Adria Cimino owns shares of Ethereum. Keith Speights has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Bitcoin and Ethereum. The Motley Fool has a disclosure policy.

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