Since launching in April 2020, Solana (SOL -4.00%) has generated a monster return of 1,200%. This performance easily crushes that of the S&P 500 and Nasdaq Composite Index. It even trumps the increases of Bitcoin and Ethereum (ETH 1.11%), the two most valuable cryptocurrencies, in the same time period.
But can Solana continue its rapid climb in the years ahead and help you retire early? Let's take a closer look.
An overview of Solana
Like Ethereum, Solana allows for the development and functioning of smart contracts, which opens the network to the creation of various decentralized applications, like decentralized finance protocols and platforms for non-fungible tokens. At its peak at the height of crypto asset boom in November 2021, Solana had more than $10 billion in total value locked on its blockchain. This is the amount of money that has been deposited into different apps.
Solana runs a proof-of-stake consensus mechanism. But what makes it really stand out is something called proof-of-history, which eliminates the need to add time stamps to blocks, thus reducing data load. This innovative feature is why Solana can process an incredible 50,000 transactions per second (TPS). It's no wonder Solana is often called an "Ethereum killer" because of its ability to disrupt the leading programmable blockchain.
Solana also has some potential real-world use cases. Last February, Solana Labs, the organization tasked with driving the strategic direction of the network, introduced Solana Pay, which allows a merchant and customer to transact directly with no intermediaries, and with instant settlement and virtually no fees. It also allows the merchant to build deeper connections with customers by layering on loyalty programs and other features.
And Solana announced an Android smartphone called the Saga. The goal is to get more people to use the Solana platform by making it easier to get them onboard and accessing Web3 services. Delivery of the phone will start early next year.
Time will tell whether these innovations will work as intended and bring more users and activity to Solana. But it's a positive sign to see a cryptocurrency project actually working on building real-world products and services.
Should you invest in SOL?
Despite all the positive attributes of Solana that I outlined above, there are some important risks to consider. It has experienced major network outages in the past (three in 2022), instances where users weren't able to access the blockchain. Anatoly Yakovenko, Solana's co-founder, says that a fix is on the way.
Also, digital wallets where users store their SOL have been hacked before. In August, more than $5 million was stolen from about 8,000 Solana wallets. This issue certainly was a huge blow to the trust and confidence people have in Solana specifically and crypto more broadly.
Another thing investors should consider is Solana's ties to Sam Bankman-Fried, former head of failed crypto exchange FTX. He was a strong supporter of Solana. And his trading firm, Alameda Research, which also collapsed, was a big investor. If the bankrupt firm is forced to sell its SOL holdings, then clearly the token's price would take a hit. The damage might already be done, however, as the price of Solana has dropped 62% since Nov. 1 (as of this writing). But this might just be a near-term risk that has minimal impact on Solana's long-term viability.
Solana has certainly produced a monumental return since its public launch, probably making some early investors wealthy beyond their wildest dreams. But looking ahead, it's difficult to forecast what the potential returns will be. If Solana gains adoption in payments, which is likely it's biggest possible opportunity, then the network could continue rising in value in the long term.
Investor who believe in Solana's prospects, even after taking into account the risks and uncertainties, should look to add a small allocation (1% of a portfolio). If it works out, your overall returns could get a boost. If it doesn't, on the other hand, then losing 1% will have minimal impact.