I was writing about Ethereum (ETH -0.14%) and Solana (SOL -3.83%) the other day, and I said, "Blood is in the water and Solana is a great white shark." Solana came out of nowhere last year and had shocking returns for early investors. Its coin ran up almost 11,000%. And it's not the only one. Avalanche (CRYPTO: AVAX) jumped 3,000%. Fantom (CRYPTO: FTM) -- which is so new Coinbase doesn't offer the coin yet -- ran up 14,000% for the year.
It's my belief that the massive run-up for these new crypto names suggests that the old guard might be in trouble. And yet Ethereum's coin had a great year for a megacap, jumping over 400% in 2021. Ethereum might be a big orca, but it doesn't seem to be bleeding much. And what's fascinating is that when we compare Ethereum to Bitcoin (BTC -2.60%), we see the exact same phenomenon. Ethereum has been killing Bitcoin for years! I thought it would be close. Not close at all. So let's look at some crypto charts.
Ethereum's coin is up 34,000%
Here's a five-year chart for Ethereum and Bitcoin. This dates from January 3, 2017. Bitcoin is up 4,000% in that time. So if you invested in Bitcoin five years ago, you've made 40 times your money. That's an incredible return, right? Now look at Mount Ethereum.
If you invested in Ethereum five years ago, you made a 34,000% return. That's a 340-bagger, for the kids playing at home. If you invested $3,000 in the coin, you're a millionaire now. Meanwhile, if you bought a stock index fund, you've doubled your money. You've now got $6,000. (That's not horrible. At that rate, you'll be a millionaire in 45 years).
What's remarkable is how fast it all happened. You can see why Ethereum holders are confident. (If your investment went up in value 340 times, would you be worried?) On the other hand, if you're not an owner of Ethereum, this chart could actually make you a little nervous. It's gone up so far already -- I'd be worried that I missed it. (And, in fact, I have not bought any Ethereum coins).
2021 brought in a new wave of crypto
Last year was a remarkable crypto year. Solana investors made 110 times their money. Fantom investors made 140 times their money. If you invested $3,000 each in those two coins last January, you're not a millionaire yet. But you're pretty close. Your $6,000 is now worth $750,000. So let's look at a one-year chart. We'll measure Bitcoin, Ethereum, and Solana.
The Solana chart is so overwhelming, you might miss how great a year Ethereum had. It went up 400%. A $3,000 investment in Ethereum in January is now worth $15,000. And of course, if you bought Ethereum a few years ago, you've made a boatload of money.
Nonetheless, a $3,000 investment in Solana a year ago is now worth $330,000. You'd be hard-pressed to find any noncrypto investment soaring so quickly.
Why is Solana rocking so hard? For that matter, why has Ethereum been stomping Bitcoin for years? What is causing this demand for alternatives to Bitcoin (aka altcoins)?
The crypto universe needs a platform to sit on
Since Ethereum was introduced, it's been the major platform for crypto development. If you wanted to build out a decentralized application (dApp), you'd probably make sure it was compatible with Ethereum's blockchain. So, for instance, if you wanted to provide a way for people to stake their crypto and get paid interest, you'd want to work with Ethereum. People play games on the blockchain. You can buy art, called non-fungible tokens (NFT), on the blockchain. All of those things require transactions to happen.
Bitcoin is way too slow for any of that. Bitcoin relies on proof of work to validate a transaction. It takes 10 minutes on average to do the work and add a block to the chain. And Bitcoin requires six confirmations before the transaction is finalized (i.e., five more blocks have to be added to the chain). So Bitcoin's time to finality is about an hour. As far as transaction speed is concerned, that's kind of insane. Imagine swiping your credit card and having to wait an hour for the transaction to clear!
Ethereum is way faster than Bitcoin. Every second, 15 transactions happen on Ethereum's network. And the transaction is finalized in a little over a minute. So that's why Ethereum's coin has been stomping Bitcoin for years. According to Coinbase, the Ethereum network settles trillions of dollars in transactions every year, and $170 billion is locked on the platform.
The problem is that Ethereum doesn't scale. As more and more people try to get their transactions on that blockchain, the wait times get longer and the price to get on the blockchain goes up. Look at this shocking chart:
Over $300 at one point. If actual gasoline cost that much, I wouldn't drive my car. Solana, meanwhile, costs a fraction of a penny. Thousands of transactions happen on the Solana network every second.
So to me, a crypto newbie, investing in Solana seems like kind of a no-brainer. And yes, I missed that huge gain last year. But that's OK. If my investment thesis is correct, and we are seeing a new blockchain platform emerge, that coin is going to be incredibly valuable. (I've been buying Fantom lately, for similar reasons).
These charts give me a lot of confidence. We see Ethereum crushing Bitcoin over the last five years, and we know why that happened -- a far more appealing network advantage. Now, as interest in crypto has exploded, the limitations in Ethereum's network are starting to show. So that's why the crypto market is getting excited about Solana. And why I want to own it.