If Cathie Wood Is Bullish on Solana, Should You Be Too?

Given the huge price rally for Solana (SOL -0.44%) this year, it’s no surprise that investors, traders, and analysts are now rushing to put out fantastic new price predictions for Solana. With Solana up nearly 450% for the year and now trading around the $55 mark, many now suggest that Solana could soon break through the $100 level before regaining its all-time high of $260.

Of course, for that to happen, Solana will need to continue to gain ground at the expense of chief rival and market leader Ethereum (ETH 0.10%), which is still 10 times more valuable. But just how realistic is that scenario? Let’s take a closer look.

The “faster and cheaper” argument

The primary investment thesis for Solana overtaking Ethereum can be summarized in just three words: Faster and cheaper. One of the proponents of this investment thesis is high-profile investor Cathie Wood of Ark Invest, who has long been known for her bullish views on Bitcoin (BTC -0.40%) and all things crypto. On CNBC, Wood recently suggested that the reason why Solana is so valuable is because it is faster and cheaper than Ethereum.

In many ways, I agree. Being faster and cheaper is a huge source of competitive advantage and can be used to gain market share at the expense of market leaders. It explains why users and developers might eventually migrate over to Solana from Ethereum. Lower costs and faster transaction processing times are paramount for success in areas like decentralized finance (DeFi), Web3, and gaming.

But, as we know from the past 50 years of history in the tech industry, the cheapest and fastest technology does not always win. There are other factors to take into account, including network effects and first-mover advantage. And, in terms of network effects and first-mover advantage, Ethereum still has an overwhelming advantage over Solana.

Moreover, there are a handful of blockchain rivals that claim to be cheaper and faster than Solana after taking into account actual, not just theoretical, speeds. In fact, a brand new competitor on the scene — Aptos (APT -0.27%) — has been touted as a “Solana killer” because it’s so blazingly fast and cheap. So what makes Solana so much better than these other competitors?

The “better and more innovative” argument

Thus, with all due respect to Cathie Wood, a superior argument for investing in Solana is that it is “better and more innovative” than other blockchains. This helps to explain Solana’s competitive advantage vis-a-vis other Layer 1 blockchains such as Ethereum.

For example, Solana stands alone among all other blockchains in terms of having a mobile crypto strategy that includes a blockchain-optimized “crypto phone” (the Saga). And Solana made waves this September after launching a groundbreaking new payment project with Visa. That’s just something that you’re not going to find with rival Ethereum, and certainly not with Bitcoin.

From my perspective, this “better and more innovative” argument also does a better job of explaining why Ethereum rapidly closed the gap with Bitcoin in terms of market capitalization. According to Wood, the reason why this happened is because Ethereum was faster and cheaper than Bitcoin.

But the real reason why this happened is because Ethereum was the first-ever blockchain to offer smart contracts, and these eventually became the building blocks for non-fungible tokens (NFTs) and decentralized finance (DeFi). In short, Ethereum was “better and more innovative” than Bitcoin, and that made all the difference in terms of creating market niches that had never existed before.

Faster, better, cheaper

There’s a classic saying in the tech industry: “Faster, better, cheaper — pick two.” It’s a saying popular with project managers, engineers, and venture capitalists, and it is a very easy way of understanding competitive advantage in the tech world. Basically, pick two out of the three characteristics of market leaders, execute on them better than anyone else, and you’ll eventually become the market leader.

I think this is why Cathie Wood has focused on the “faster and cheaper” argument for Solana. “Faster and cheaper” makes a lot of intuitive sense, and it’s an argument that probably resonates with institutional investors. Best of all, it explains Solana in a way that abstracts away all the complexity of blockchain technology.

Is “faster and cheaper” enough?

But I don’t think that “faster and cheaper” is a strong enough investment thesis. If that were the case, you should probably be buying Aptos right now and not Solana. Aptos is actually up 107% this year, so maybe that’s what a lot of investors are actually doing.

I agree with Cathie Wood that Solana is a very intriguing investment prospect right now and that the valuation gap between Ethereum and Solana should be much smaller than it is right now. However, I’m focusing on “better” and not just “faster and cheaper” as a way of thinking about Solana. I think Solana is better and more innovative than other blockchains, and that’s why I remain long-term bullish on its future growth prospects.