The total value of all cryptocurrencies in circulation peaked at $4.4 trillion in late 2024, and it has since plummeted by 45% to just $2.4 trillion as I write this, with the declines accelerating over the last few months. None of the major tokens or coins have escaped the carnage, not even those with genuine use cases that are supposed to drive real value.
Solana (SOL 1.59%) is the native cryptocurrency in a unique network with the same name, which was launched in 2020 as a cheaper, faster, and more capable version of the Ethereum (ETH 0.73%) network. A growing number of developers use the Solana platform to build decentralized applications, which are popular in industries like gaming and finance.
Solana is currently down 67% from its 52-week high. In theory, its value should increase as more people use its network, which means the recent sell-off might be a solid long-term buying opportunity.
Image source: Getty Images.
A highly efficient alternative to Ethereum
Ethereum remains the world's leading platform for developing decentralized apps. Slivers of computer code called smart contracts lay out the rules for each app's functionality, and they typically can't be changed, so no human or company can seize control. This ensures every user receives equal treatment, no matter what.
The Ethereum network itself is also fully decentralized. Instead of relying on one large data center, the network runs on thousands of nodes (computers) all over the world, which maintain updated copies of its blockchain. Therefore, the network won't be compromised even if a few of those nodes suffer an outage. This is how Ethereum achieved 100% uptime over the last decade.
The Solana ecosystem is very similar, except it was built with improvements that address some of Ethereum's limitations. Ethereum uses a proof-of-stake (PoS) validation mechanism, which requires the network's participants to put up coins as collateral for the right to verify transactions on the blockchain. They earn interest on those coins, but they can also lose them if they engage in any malicious behavior.
Solana uses PoS, too, but alongside a proof-of-history (PoH) validation mechanism that encodes every blockchain transaction with a timestamp. This speeds up verifications so thousands of transactions can be processed per second, whereas the Ethereum network can typically only handle 15 transactions at a time before congestion drives a surge in "gas" fees.
As network activity increases, so does the demand for Solana, because whenever a user activates a smart contract in a Solana-based decentralized app, they trigger a fee payable in Solana coins. Its fees are much lower than Ethereum's fees because of its hybrid PoS and PoH validation mechanism, so the network is growing in popularity among developers.
Solana might have a supply issue
The Solana network is programmed to constantly "mint" new coins to pay interest to validators. Without these rewards, validators wouldn't participate and the ecosystem would no longer work. However, this also means the circulating supply of Solana is always increasing, which slowly dilutes the holdings of existing investors.
There is a pre-programmed mechanism that tapers the rate of supply growth (inflation) by 15% each year. Therefore, although supply increased by 8% in Solana's first year, it will only increase by 4% this year, and the inflation rate will continue to drop until it bottoms out at 1.5% in the future.
Some Solana tokens are burned in each transaction, meaning they are removed from supply forever. In theory, this means its circulating supply could begin to shrink if the network becomes popular enough, which is good news because I've never seen an asset grow in value over the long term if its supply endlessly increases. However, Solana might still be years, or even decades, away from that point.
Should you buy Solana on the dip?
Decentralized apps are becoming more popular, but they still haven't achieved mainstream appeal. For example, some of the popular apps built on Solana so far include the Jupiter cryptocurrency exchange and the Magic Eden marketplace for non-fungible tokens (NFTs). I'd bet most people outside the crypto community have probably never even heard of them.
CRYPTO: SOL
Key Data Points
On the plus side, activity does appear to be increasing in the Solana network. The number of daily active wallet addresses in the network soared to an all-time high of 9 million last year, and although it has ticked down to 6.5 million as of this writing, that is still much higher than at any point prior to 2024. The trend is lumpy, but Solana seems to be attracting more users over time.
Nevertheless, it's impossible to ignore Solana's 67% decline from its 52-week high, which happened even in the face of the perceived increase in network activity. There is no escaping the fact that speculative investors still heavily influence the value of most cryptocurrencies, so while Solana might be an intriguing buy for anyone who believes in the future of decentralized apps, it's important to manage risk by keeping position sizing small.
