Applauded for its exciting features and disruptive potential, Solana (SOL -7.08%) burst onto the scene in March 2020, right around the start of the coronavirus pandemic, and quickly skyrocketed nearly 26,000% in value to its all-time high in November 2021. Then with the general negative sentiment surrounding the industry, the price of SOL tanked 96% between its peak and the end of 2022. This roller coaster ride is indicative of how speculative digital assets work.
Things have started to quickly turn positive recently. As of this writing, Solana has more than doubled in 2023. Should investors ride the momentum and buy this seemingly unstoppable crypto now?
A difficult year for the industry
After roughly tripling in value in 2021, the entire crypto market tanked in 2022. It started the year at a market value of $2.2 trillion, only to drop below $800 billion by the end of December. We all know that the cryptocurrency market is extremely volatile, but this was hard to stomach for many investors.
Tighter monetary policy by major central banks across the world resulted in risk-off sentiment from investors, and cryptocurrencies were the hardest hit. But this factor only deserves part of the blame.
Making matters much worse was the string of high-profile blowups that happened in 2022. Chief among them was the FTX debacle, where the now-bankrupt crypto exchange was using client funds to enter speculative trades by its sister firm, Alameda Research. These unfortunate events shined light on just how risky, complex, and opaque the industry really is.
It also became known that Alameda Research held around 20% of SOL's outstanding token supply. Worries about a forced liquidation placed downward pressure on SOL's price late last year.
Solana's potential
Despite the gray clouds hanging over the crypto market, SOL does possess some exciting features that help it stand out among the more than 22,000 different projects out there. Solana is known for its incredible speed, with a theoretical throughput of 50,000 transactions per second (TPS). That's right up there with the Visa network's capacity of 65,000 TPS -- and compared to Ethereum's 13.
Solana's consensus mechanism (the way the system verifies transactions and secures the blockchain) is a combination of proof of stake and proof of history. The latter is an inventive feature that eliminates the need to carry time-stamp data, leading to faster throughput.
This makes Solana interesting for certain uses, particularly payments. Solana Pay is a service that allows merchants to directly accept payments from customers with virtually no fees and instant settlement, with transactions occurring on the blockchain. For small businesses with already thin margins, this could be a boon for profitability since they could avoid paying high fees to traditional payment providers.
And the Solana Mobile smartphone is set to ship early this year. It will be the world's first web3 smartphone, connecting with the Solana ecosystem and allowing users to engage in different decentralized applications. It's too early to tell how much adoption this product will achieve, but it's a positive development meant to attract more users to the crypto economy generally, and Solana more specifically. The goal is to raise demand for SOL, which could drive its price higher.
Solana's market cap is $8.6 billion, making it the 11th most valuable cryptocurrency in the world. Even with the huge price jump so far in 2023, if this innovative blockchain network can deliver on its promises, it's likely to be worth a lot more in the future. For investors willing to take the risk, it might make sense to allocate a tiny portion of a portfolio to SOL with a time horizon of at least five years.
