This innovative cryptocurrency has soared during the past 18 months.
Given their huge market caps and impressive historical performances, it makes sense that Bitcoin and Ethereum get most of the attention when investors look at the cryptocurrency industry. They are undoubtedly the two networks that people are most familiar with.
But there are under-the-radar digital coins, like Solana (SOL -1.97%), that can't be ignored. This innovative blockchain has seen its price skyrocket 1,340% since the start of 2023, a better run than the top-two cryptocurrencies I just mentioned.
As of this writing, Solana trades about 40% lower than its all-time high, which was set in November 2021. Does this mean you should buy this token while it's below $200? Let's take a closer look.
Standing out from the crowd
Solana is a unique cryptocurrency in the way that it's structured. It's like Ethereum in the sense that it operates a proof-of-stake consensus mechanism. This means that owners of tokens can stake their holdings to help approve new transactions. This makes it energy efficient.
Solana also has something called proof-of-history. This system eliminates the need to add time stamps to blocks, freeing up data requirements. Consequently, Solana can process transactions at a blistering pace of about 50,000 per second. That's significantly faster than Bitcoin (5 transactions per second) or Ethereum (14).
Solana's fast throughput also results in extremely low fees. To move money around, users are only required to pay fractions of a penny.
Payments-use case
It's safe to say that the vast majority of the thousands of cryptocurrencies out there are useless. They serve no purpose, and they aren't trying to solve a problem.
Solana definitely tries to buck this trend. Those favorable attributes I noted above can be very valuable in one particular use case. I'm talking about payments.
Introduced in early 2022, Solana Pay is a payments system that directly connects merchants and consumers via the blockchain. Transactions settle almost instantly with close to zero fees. Merchants that operate with thin margins benefit tremendously, as they can translate more of their sales into profits.
Plus, innovative features can be added. After purchase, consumers can receive receipts in the form of non-fungible tokens. These allow merchants to maintain direct relationships with their customers while providing a valuation channel to send special offers to.
Shopify, the huge e-commerce platform, has now integrated with Solana Pay to make it easier for its merchants to start using the payments service. This could lead to greater usage over the long term.
Think long term
Cryptocurrencies can experience rapid price swings in short order that have nothing to do with fundamental developments. Hype cycles reign supreme in the short term. And while it can be so easy to get caught up in these wild price movements, it's critical that investors looking to put money to work in crypto maintain a very long-term perspective.
To be clear, buying Solana is still an incredibly risky endeavor, especially when compared to owning blue chip stocks. What the industry will look like five or 10 years from now is way too unpredictable. And it's really anyone's guess how things will shake out.
While I think it's admirable that Solana is actually focused on trying to find ways of boosting adoption, namely with payments and a mobile strategy, I still think there's extremely high levels of uncertainty as to its ultimate success. This leads me to avoid buying this token, even though it's below $200.
If you're more comfortable with taking on higher levels of risk, I can certainly see why buying a tiny amount of Solana makes sense. Just be ready for the inevitable volatility.
Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bitcoin, Ethereum, Shopify, and Solana. The Motley Fool has a disclosure policy.
