Is Solana a No-Brainer Buy After the Bitcoin Halving? | The Motley Fool (2024)

Bitcoin (BTC -0.58%) has gone through four "halvings," which halved the rewards for mining the cryptocurrency, every four years since 2012. The bulls consider those events to be major catalysts for Bitcoin because they tighten up its supply.

Bitcoin's price surged 109% in the 12 months leading up to its latest halving on April 19. That rally, which was amplified by hopes for lower interest rates and the approvals of the first spot price Bitcoin ETFs this January, also lifted other cryptocurrencies.

Yet Bitcoin's price has dipped about 2% since that fateful day. That pullback suggests that a lot of investors bought Bitcoin ahead of its halving, but the lack of additional catalysts might be preventing new investors from jumping in.

So instead of focusing too much on Bitcoin right now, investors should pay more attention to other smaller cryptocurrencies that have been generating bigger gains. One of those tokens is Solana (SOL -1.01%), which soared 472% in the 12 months leading up to Bitcoin's halving and advanced another 8% in the following months. Is it a no-brainer buy right now?

The difference between Bitcoin and Solana

Bitcoin is mined with an older and more energy-intensive proof of work (PoW) method, while Ether (ETH -0.15%), Solana, and other, newer cryptocurrencies are mined with the faster and more energy-efficient proof of stake (PoS) method.

PoS blockchains support smart contracts, which can be used to develop decentralized apps (dApps), games, non-fungible tokens (NFTs), and other crypto assets. PoS tokens can also be "staked" (locked up) on the blockchain for a period of time to earn rewards. PoW blockchains are only natively used to directly mine cryptocurrencies.

Simply put, PoW tokens are valued by their scarcity, while PoS tokens are valued by the growth of their ecosystems. That's why crypto investors generally favor the PoS blockchains, which have the highest transaction speeds and the lowest fees.

Why are investors excited about Solana?

Solana is the world's fastest PoS blockchain. It's built on the same PoS tech as Ethereum, but it accelerates the process with its own proof of history (PoH) method. That upgrade allows Solana to process transactions 46 times faster than Ethereum and five times faster than its closest competitor Polygon (MATIC -0.08%). However, Solana has only reached about 1.6% of its theoretical max speed -- so it could significantly widen its lead against Ethereum, Polygon, and other PoS blockchains.

Solana's speed is driving the rapid expansion of its ecosystem. It's been used to develop decentralized exchanges like Jupiter and Orca, as well as popular meme coins like BONK and WIF. It helps Visa (NYSE: V), PayPal (NASDAQ: PYPL), and Circle settle their stablecoin transactions, and it's integrated its Solana Pay payment protocol into Shopify's (NYSE: SHOP) e-commerce services. Solana even launched its own Android smartphone for Web3 apps, the Saga Phone, last year. It's still a niche device, but it features its own dApps Store as an alternative to Alphabet's Google Play Store. That ongoing expansion should stabilize and boost the value of Solana's native cryptocurrency over the next few years.

Will Solana overcome its near-term challenges?

Solana faced three major headwinds over the past two years. First, it suffered a series of network congestion and security failures as it dealt with an increasing number of spam transactions. Second, the failed cryptocurrency exchange FTX -- which had been one of Solana's biggest backers -- hastily liquidated its tokens at a discount to pay off its creditors. Lastly, rising interest rates drove investors away from Solana and other speculative cryptocurrencies.

But looking ahead, most of those headwinds should dissipate. Solana's developers are trying to resolve its congestion and security issues with new updates, and FTX finally completed its $2.6 billion sale of discounted Solana tokens in May. If interest rates stabilize and decline over the next few quarters, the cryptocurrency market should warm up again.

So is it the right time to buy Solana?

Solana, like many other cryptocurrencies, seemed to lose its luster after Bitcoin's spot price ETF approvals and halving earlier this year. However, I believe that complacency has created a great buying opportunity in promising tokens like Solana -- which has clear long-term advantages against Bitcoin, Ether, and other PoS tokens.