Bitcoin (BTC 2.53%) has taken up most of the conversation in cryptocurrency for more than a decade, and it's the biggest cryptocurrency by market cap today by a wide margin. But smaller coins like Solana (SOL 3.79%) are starting to eat into that lead, and Solana's 10,970% gain in 2021 far exceeded Bitcoin's 57.6% rise.
However, the competition between Bitcoin and Solana isn't exactly for the same space in the crypto economy. Bitcoin is increasingly being thought of as digital gold or an inflation hedge. Solana is a cryptocurrency built for low-cost, high-speed transactions, making it more of a utility coin. And these differences are why I think Solana will outperform Bitcoin again in 2022.
Image source: Getty Images.
A shift is already happening
We can get some clues into where crypto traders' money is flowing from Coinbase's (COIN +3.26%) trading volume statistics. Bitcoin accounted for 32% of total trading volume in the third quarter of 2020 but that fell to just 19% by Q3 2021. Ethereum (ETH 3.57%) gained 4 percentage points of market share, moving from 18% to 22%, but other cryptocurrencies jumped from 50% of trading volume to 59% over the last year -- among them, Solana.
A similar story is forming with developers. It's hard to define developer activity in the fast-moving crypto world, but it's safe to say that Solana's developer community is booming while Bitcoin's is stagnant. In just the last two months, Solana Ventures, the venture capital arm of Solana, has announced $250 million in venture capital funds to build out games. This is on top of NFT marketplaces and finance projects, which are already hitting the market.
Here's another indication of Solana's growth. Phantom, which is a popular wallet on Solana that holds crypto, tokens, and NFTs, recently tweeted that it has grown to 1.8 million monthly active users.
1/4 — 2021 has been an incredible year for Phantom & the @solana ecosystem! We opened up our invite-only beta in March and then launched publicly in July.
— Phantom (@phantom) January 1, 2022
In just 9 months we have grown to over 1.8M monthly active users with no sign of slowing down! pic.twitter.com/kY4tjBQuyv
By any measure, Solana is booming, and its gains are coming at the expense of formerly popular cryptocurrencies like Bitcoin.
What if Bitcoin is digital gold?
One argument for Bitcoin is that it's digital gold -- an asset that will always retain value just like physical gold. But if that's the case, the upside for utility tokens should be much bigger than gold-like tokens, if the analogy to the physical world is any indication.
- The global market capitalization of gold is about $11 trillion, according to multiple estimates.
- U.S. stocks alone are worth $49 trillion, according to Siblis Research, as of Sept. 30, 2021.
- Europe's publicly traded companies are worth $8.1 trillion, according to Trading Economics.
- Global real estate is valued at $326.5 trillion, according to research firm Savills.
These are estimates, but they show that investors value businesses that provide utility, growth, and earnings more highly than they value gold in the real world. And this doesn't include the value of small businesses. How should we translate this to the digital world?
I think the clear lesson is that utility and physical land are more valuable than gold. So, it would logically make sense that the utility of the crypto economy would be worth more than crypto's digital gold over the long term.
Solana has a lot of upside
Comparing Solana and Bitcoin market caps directly isn't quite fair. Bitcoin's value is primarily to those who hold it, while Solana is more like a fiat currency, used as a medium of transaction for NFTs and other tokens. However, their market capitalization is the best proxy we have today, and a reasonable basis for comparison of these two cryptocurrencies.
Bitcoin has fallen from its $1 trillion-plus valuation, but has a market cap of $870 billion as I'm writing, while Solana's market cap is $50.8 billion. If you believe the argument above that cryptocurrency and the digital economy will be about owning utility and not just digital gold over the long term, then Solana should be one of the biggest winners. That's why I think it will outperform Bitcoin in 2022 and beyond.
