The 1 Cryptocurrency I'm Buying in March

The U.S. Federal Reserve is getting ready to start raising interest rates, sucking the bullish air right out of the market as investors reassess the valuations of risky assets like stocks. Cryptocurrencies have been hit hard too -- a reminder that while blockchain-based technology is exciting and has lots of potential in the coming decades, this is a very new and very volatile space to invest in. The top two cryptos by market capitalization, Bitcoin (CRYPTO: BTC) and Ethereum (CRYPTO: ETH), are each down over 40% from all-time highs as of this writing.

But given the potential for blockchain, I'm still dabbling (for me, that means less than 1% of my total investable net worth). This month, I'm adding to a very tiny existing position in Solana (SOL -6.86%). Here's why.

Image source: Getty Images.

An "Ethereum killer" with actual merit?

Like Ethereum, Solana's blockchain network was designed to support decentralized applications (or dApps, meaning peer-to-peer interaction with no centralized control). Ethereum has thousands of dApps based on its network, while Solana only has a couple hundred, although there are dozens more in development.

Created a couple years after Ethereum and launched in 2020, Solana is getting lots of attention. Its network is one of the quickest out there, boasting the current ability to process up to 65,000 transactions per second (which is similar to Visa's (NYSE: V) implied network speed). That compares to Ethereum's current limit of about 15 to 30 transactions per second. 

Solana uses a concept known as proof-of-stake (PoS) to verify transactions on the network. PoS allows owners of a crypto to participate in the validation process. Along with PoS, Solana also devised a concept called Proof of History, which embeds a time stamp into transactions so the network doesn't need to reach a consensus on which ones to validate first. As a result, fees for utilizing Solana (known as gas fees) can be as low as a fraction of a penny, which compares to as much as a couple hundred dollars on Ethereum.

There's no real way to value Solana, but...

The way I see it, the problem with investing in cryptocurrencies is there's no real way to value them. They aren't businesses. Rather, they're an asset that a business develops or utilizes (Solana Labs, the private company headed by CEO and Solana co-founder Anatoly Yakovenko, develops the Solana blockchain network). Like Bitcoin and Ethereum, Solana has thus taken a big hit as investors have fled risky investments (that is to say, those with more uncertain future values) in recent months. Its tokens are down nearly 70% in value from their all-time peak reached late in 2021. That gives Solana a "market cap" of nearly $26 billion as of this writing.

Data source: as of March 14, 2022.  

A cryptocurrency's price performance is indicative of its growing popularity among developers, as well as uptake among investors buying the tokens. Even after the recent downturn, Solana is up big since its launch, indicating the excitement surrounding the blockchain project.

Data by YCharts.

Another way to "value" a crypto could also be the rewards gained from staking, when a participant in a PoS blockchain network uses their tokens to help validate transactions and get rewards. Currently, Solana pays a 5.8% reward as of this writing (paid in more Solana tokens), less an average 9.8% fee taken from the reward. This compares to a 4.8% reward from staking Ethereum, minus an average 10.9% fee. However, the "adjusted reward," which takes into account growth of supply in overall tokens on the blockchain, is only 0.94%. Ethereum's adjusted reward is currently 4.36%.

For Solana in particular, a fast-growing increase in tokens will dilute an owner's stake in the crypto over time, unless they "stake" their position (which Solana explains how to do here). The short story: There's no way to put a concrete valuation on Solana like we can with a business. This is a highly speculative asset that will begin rising once again or continue falling in value based solely on demand.

But there are some exciting projects being built on Solana, like the recently announced Solana Pay that directly connects merchants and shoppers in a first-of-its-kind peer-to-peer blockchain payments solution. What that dApp could mean for merchants is near-instantaneous settlement of funds into their merchant accounts with close to zero fees (compared to a 3% fee of total transaction value utilizing Visa), and the ability to reward customers directly using other digital assets built on Solana. 

A promising but highly speculative bet

As exciting as applications like Solana Pay sound, buying Solana tokens isn't a direct investment into it or any other business. It's a speculative bet. For a more low-risk, potentially high-reward play on blockchain technology, I prefer keeping most of my investment assets in businesses like Alphabet's (NASDAQ: GOOGL)(NASDAQ: GOOG) Google Cloud, Shopify (NYSE: SHOP), and even Coinbase Global (NASDAQ: COIN) -- companies that are using crypto and blockchain to generate revenue and profitability. 

That's why I'm keeping Solana and other cryptos as a fraction of a percent of my investment value at this point. Solana is still small and its value could continue deteriorating. But if developers and other speculative investors continue to flock to it, this newer blockchain network could soar one day.