The cryptocurrency market, like the stock market, has taken a beating in 2022, as its value has plummeted by roughly two-thirds through the first nine months of the year. Major central banks across the world are largely to blame, as they have tightened monetary policy and forced investors to shun the riskiest and most speculative financial assets.
In particular, Solana (SOL -4.95%), which is the ninth-most valuable cryptocurrency with a market cap of $11.6 billion (as of this writing), is down more than 80% in 2022. Is now the time for investors to buy the dip on this top digital asset?
Solana has unique characteristics
Like Ethereum, Solana's blockchain allows for the development of smart contracts. These are self-executable computer programs that run when two unrelated parties satisfy specific conditions. Requiring no intermediaries, smart contracts can dramatically increase the functionality of a blockchain.
What's more, Solana has been running a proof-of-stake (PoS) consensus mechanism well before Ethereum's The Merge. Aimed at being scalable and environmentally friendly, PoS lets token owners lock up their holdings to help validate new transactions and earn more tokens.
In addition to this, Solana also incorporates proof-of-history, which eliminates the need to add time stamps to blocks, reducing the data load and allowing for faster throughput. It's a serious innovation, and it's why Solana can theoretically process 50,000 transactions per second (TPS). That's compared to the less than 15 TPS that Ethereum currently handles.
It's no wonder then that Solana ranks among the top networks when it comes to developer activity, a key indicator of the potential long-term viability of a cryptocurrency. These developers build new features that add utility to the network. For example, Solana Labs recently announced the Saga, a Web3 smartphone that makes it easier to use the features that Solana has to offer.
But despite possessing some impressive attributes, Solana has had some issues in the past. In August, wallets carrying SOL had been compromised, with customer funds being stolen. And before that, in June, Solana's network faced an outage, causing decentralized applications to go offline. In the wild world of crypto, these occurrences shouldn't surprise anyone.
Disrupting payments
Nonetheless, Solana's incredible speed, coupled with low transaction fees that are fractions of a penny, make it a possible threat to the payments industry. In fact, Solana Labs launched a new service called Solana Pay in February.
Solana Pay creates a direct connection between a customer and merchant at the point of sale, with payment being made using a QR code and the SOL token. The benefit is that processing fees are virtually zero, and this setup allows the merchant to develop a deeper connection with the consumer, paving the way for more robust loyalty programs and even the introduction of non-fungible tokens.
Disrupting financial services, and especially the payments industry, is a huge opportunity for cryptocurrencies. Blockchain technology promises to cut out intermediaries, while at the same time reducing fees, features that are common in the electronic payments sector. For merchants with thin profit margins, doing away with processing fees can be a huge boon to the bottom line.
Some of the biggest payments businesses out there, including Visa, Mastercard, PayPal, and Block, have a combined market cap of nearly $800 billion. Even if Solana Pay can penetrate a tiny fraction of this massive pie, it could see the network's value soar over the coming decade.
What should investors do?
I think Solana has fantastic potential, because it has already proven its ability to create a specific, real-world use case that can be extremely lucrative over the long term. This is something that cannot be said about many other cryptocurrencies today, which really just offer up grand promises of adding utility in the future. Solana is already adding value now.
But investors should realize just how volatile and risky digital assets are. Cryptocurrencies and blockchain technology are still in their infancy and have a long road ahead to achieve mainstream adoption. This is why I think it's best to allocate a small percentage (1% to 2%) of a well-diversified portfolio to Solana and focus on the next five to 10 years at least.
Buying the dip right now might prove to be a worthwhile financial decision.
