Better Buy: Ethereum or Solana?

After carrying out The Merge last year, Ethereum (ETH -1.57%) has been one of the top-performing cryptos in 2023. It is up more than 30% over the first nine months of the year. 

However, a number of other cryptos with large market caps have turned in an even more impressive performance. For example, Solana (SOL -3.47%), an Ethereum rival, is up a stunning 128% year to date. So, should you be buying Solana instead?

Institutional asset flows

To help answer that question, consider what’s happening with institutional asset flows in the crypto market right now. According to CoinShares, a digital-asset investment firm that tracks the weekly inflows and outflows of digital assets, Solana has become the altcoin of choice for institutional investors. Based on an analysis of digital asset flows, institutional investors appear to be moving their money out of Ethereum and into Solana.

The latest weekly numbers from CoinShares are stunning, to say the least. Out of the $78 million in net inflows, Solana received more than $24 million of the total. By way of comparison, Ethereum received $10.2 million and Bitcoin (BTC -1.20%) received $43 million. So, the net inflow of institutional investor funds into Solana was more than twice the amount that went into Ethereum.

By just about any back-of-the-envelope calculation, this shouldn’t be happening. Given that Ethereum accounts for nearly 20% of the total capitalization of the crypto market, and Solana accounts for less than 1%, there’s no reason to expect institutional investors to allocate so much of their portfolios to Solana. Still, here we are. 

And this is not a fluke, either. For the first 32 weeks of the year, Solana has seen net inflows in 28 of them, according to CoinShares. Moreover, net inflows into Solana are at their highest levels since March 2022. All of this suggests that momentum is continuing to build around Solana. At the same time, Ethereum continues to see net outflows and is losing momentum.

Solana’s long-term growth prospects

There are several factors that might explain new investor inflows into Solana. Perhaps institutional investors are behaving just like retail investors and are simply chasing performance. With Solana up 122% for the year, this is a distinct possibility.

Moreover, investors might be seeking out altcoins that provide superior diversification benefits. Ethereum still tends to track Bitcoin’s performance, while Solana is less correlated with Bitcoin.

However, I think there’s a much bigger factor at play here: Investors are finally waking up to the fact that Solana is superior to Ethereum as a blockchain in terms of rapid processing speed, low transaction fees, and massive throughput potential. Even after The Merge, Ethereum can still process only 15 to 20 transactions per second; Solana can theoretically process 65,000 transactions per second. That tremendous gap in speeds might help to explain why Visa recently partnered with Solana (and not Ethereum) on a new stablecoin payment project.

Taking a big-picture view, Solana could finally be fulfilling its potential as a so-called “Ethereum killer.” Ethereum is the past, and Solana is the future. There’s something to be said for the fact that, even after The Merge, Ethereum is nowhere close to Solana’s level of performance.

Is Solana really the next Ethereum?

Suppose you consider institutional investors to be the smart money. In that case, it’s highly significant that they have been voting with their portfolios and moving money out of Ethereum and into Solana throughout 2023. Do they know something that we don’t? 

While Ethereum has had a remarkable run since its launch in 2015, just about nobody is expecting it to replicate that type of performance. Since 2015, Ethereum is up 44,576.12%. Institutional investors might be looking for the next Ethereum to generate those types of otherworldly crypto gains, and have determined that Solana might fit the bill.

I’m increasingly bullish on Solana as a long-term investment. If it continues to line up big-ticket partners like Visa, then it has a legitimate chance to turn in some impressive long-term returns.