Solana has one of the most exciting ecosystems in the crypto finance space. In this article, Trading Education shares extensive insights into the factors as to why Solana coins have value. This will embolden you as a trader or investor to decide if it is worth buying Solana coins in 2022 and beyond.
Solana is a protocol that was designed to facilitate the creation of decentralized applications (DAPPs). Solana aims to make decentralized finance accessible to all.
Its native asset, SOL, and other cryptocurrencies have been touted by several economists as alternatives to fiat money such as the United States Dollar, Euro, and Great Britain Pound.
But what gives any type of currency value?
Solana (SOL) has broken into the top 10 digital assets by market capitalization.
The cryptocurrency has joined the likes of Ether (ETH), Tronix (TRX), Cardano (ADA), EOSIO (EOS), and Polkadot (DOT) into serving as a governance token that oversees transactions in their respective ecosystems.
Due to their decentralized nature, they help facilitate transactions related to decentralized lending, exchange, and yield aggregation without the help of third parties such as traditional financial institutions, clearinghouses, and insurance companies.
After Bitcoin crossed $20,000 for the second time in December 2020, several altcoins such as Ether (ETH), Uniswap (UNI), Yearn Finance (YFI), Litecoin (LTC), Ripple (XRP), and Dash (DASH) among others followed in the footsteps of the digital gold.
The first act of regulation came about when the Securities and Exchange Commission (SEC) called the use of certain cryptocurrencies such as XRP into question.
After the crypto bubbles of 2021 where Bitcoin (BTC), Ether, Cardano, and Binance Coin (BNB) among others reached new price milestones, several countries such as India and China toughened their stance on the threat of digital currencies to centralized financial systems.
One of the areas that have caught the attention of financial institutions is how to price cryptocurrencies such as Solana (SOL).
In this feature article, Trading Education is going to explore the potential price of SOL in the future since crypto-tokens continue to become a mainstream asset day in and day out.
You will get the chance to find answers to the question, what gives any type of currency value where digital or fiat?
- All types of currencies have value because they play the roles of a store of value as well as a medium of exchange.
- All successful currencies have six (6) key characteristics or attributes and they are utility, scarcity, transportability/transferability, counterfeitability, divisibility, and durability.
- The Solana (SOL) token commands a significant value in the market because it meets all the attributes of what a successful currency should be. The only pitfalls SOL and other cryptocurrencies have are their status as a unit of exchange. This pitfall has engulfed all crypto tokens because they continue to struggle to break off the dominance of fiat currencies and be accepted as a payment option by well-established corporations.
- Two attributes (transferability and utility) are challenged due to the complexities of cryptocurrency exchanges as well as the difficulties in storing cryptocurrencies in a safe and secure place.
- However, if Solana’s ecosystem continues to see the launch of more decentralized finance applications which increases the utility rate of the protocol, there is a huge chance it can capture a huge part of the crypto market. This is because 314,832,732.31 SOLs are circulating in the market from a total supply of 511,616,946 SOL. If SOL should test $1,000, someday, its market value could total more than $300 billion.
Why Currencies Have Value
A currency normally gains extensive acceptance by billions of people when it can function as a store of value, aside from its utility attribute.
To put it simply, if a currency maintains its relative value over time without depreciating, many experts believe such a currency can be classified as valuable.
Throughout history and more importantly, the beginning of civilization in Africa, commodities, livestock, and precious metals such as cowrie shells, ingots, arrowheads, beads, axes, salt, cattle, blankets, gold (gold dust and gold coins), and iron were used as money.
At the time, they were seen as assets that had a relatively stable value.
Although using these types of money helped in going about daily transactions for centuries, the human labour involved was too much. This is the primary reason heads of states (Kings, Queens, Governors, and Chiefs) shifted towards another alternative they could use as money.
Eventually, they settled on minted currency as the new form of money that will be used for the exchange of goods.
Unlike other types of money that took a long time to gain acceptance, minted currencies were accepted as a medium of exchange and a store of value in a short time.
This was because it was made out of small quantities of valuable metals such as gold and silver.
Since silver, gold, and metals, in general, have a long shelf life, there was little chance of them depreciating over time.
Carrying huge loads of minted coins started to become a problem for citizens of the world.
As a result, another change was needed to make money more portable.
This is where minted currencies were maintained but another form of currency called paper money was introduced.
Paper Money is known as representative money.
In advanced financial studies, what this means is that, although money can be used as a medium of exchange because it represents something of value, it has little or no value of its own.
Therefore, its value comes from the faith consumers have in them as a coin or note that can be exchanged for a specific commodity.
Precious metals were integral in the discussion of currency money because of their value and many countries such as the United States pegged their dollar to gold.
On 15th August 1971, President Nixon abandoned the gold standard to help citizens put their faith in the USD instead of trying to store more gold.
This is what brought the term "fiat” into the mainstream.
Fiat currencies such as the Chinese Yuan (CNY), Indian Rupee, Japanese Yen (JPY), Australian Dollar (AUD), Great Britain Pound (GBP), and United States Dollar (USD) among a host of fiat currencies by several countries worldwide are issued by central banks.
Due to the decision by President Nixon, as of November 2021, fiat currencies are not backed by precious metals or commodities.
Instead, the backing comes from the mutual understanding and acceptance of the currency by residents of countries for the payment of goods and services.
As of November 2021, countries with the highest gross domestic product (GDP) such as the United States, China, Japan, the United Kingdom, Germany, France, Brazil, and Italy use fiat currency.
Many governments of highly developed economies such as Japan, the United States, and the United Kingdom believe fiat currency is less susceptible to deterioration or loss of value over time despite global economic uncertainties.
They attribute this to the characteristics of a store of value and medium of exchange (durability).
Crypto asset investing is highly volatile and unregulated in some EU countries. No consumer protection. Tax on profits may apply.
Scarcity, Divisibility, Utility, and Transferability
The most successful currencies meet these attributes (divisibility, scarcity, counterfeitability, transportability, durability, and utility), aside from being categorized as a store of value.
Let us take a look at these attributes one by one.
According to the basic laws of economics about demand and supply, the price of an asset goes up when demand exceeds supply, and goes down when supply exceeds demand.
Taking inference from the laws of economics, you should know that although the primary value of fiat currencies comes from the faith consumers have in them, the value of fiat currency is highly dependent on supply as well.
Therefore, if there is too much money in a particular economy, the system will collapse due to a spike in the price of goods.
In such a situation, people will need large sums of money to purchase relatively lesser quantities of commodities.
To help you understand this, let us examine the case study of Robert Mugabe’s Zimbabwe.
Formerly called Rhodesia, Zimbabwe had a thriving economy after Robert Mugabe freed the country from British Colonial Rule in the 1980s.
Unfavorable economic moments in Southern Africa buoyed by wars in neighboring Rwanda led to high demand for fiat money.
His last resort was to print more Zimbabwean Dollars into the economy.
The resultant effect of Mr. Mugabe’s decision was extreme inflation and hyperinflation due to too much supply of money.
On the other hand, less supply of money, like more supply of money, is not good for any economic system.
In most cases, citizens in such a system struggle in such an economic system due to the hoarding of fiat currency by the top 10% of the population.
Too much supply and less supply have led to the creation of concepts such as monetarism.
According to analyst Osikhotsali Momoh, “Monetarism is a macroeconomic theory which states that governments can foster economic stability by targeting the growth rate of the money supply.”
Numerous central banks around the world have come to the utmost realization that one of the best ways by which scarcity can be controlled is to constantly print fiat currencies.
Printing fiat currencies constantly at a preset amount of inflation helps control the value of fiat currency.
While most developed economies have a present amount of inflation, most developing economies do not.
This is why developing countries continue to experience inflation-related issues and see constant depreciation of their currencies on exchanges when traded against other fiat currencies from developed countries.
Successful currencies have the attribute of divisibility. This means that the currency should be able to be divided into smaller incremental units.
Fiat currencies can be divided into 2 decimal points. A great example is 1.00.
On the other hand, cryptocurrencies such as Solana (SOL) can be divided into 8 decimal points. After being modeled after Satoshi Nakamoto’s Bitcoin, you can buy fractions of SOL and other coins.
Divisibility of crypto can be written as 1.00000000.
This is relevant because goods come at different prices.
Therefore, a currency can only be functional as a medium of exchange if it is flexible enough to be divided.
In advanced economic studies, divisibility is paramount since it helps provide an accurate measure of the real value of goods.
Let us take a look at a breakdown of how divisibility works in fiat and cryptocurrencies.
With fiat currency, you can swap $20, £20, €20, or ¥20 notes for two ($10, £10, €10, or ¥10), and it would result in the same value.
In case you find money to purchase approximately 0.56521739 SOL, the two fractions of Solana tokens can be exchanged for a full SOL coin (0.43478260 + 0.56521739 = 1).
Without being useful to citizens, it will be difficult for any currency to gain acceptance by millions of people.
A currency can be successful if billions of people believe in representative money as a sure way to buy goods and services.
This is the primary reason why different forms of currency money were created over the years to help people avoid carrying loads of livestock, commodities, and metals during the barter trade era.
One of the most important linkage utility have is their relationship with transferability.
If a currency cannot be moved from one geographical location to the other effortlessly, its utility may be called to question.
This is the primary reason why livestock, metals, and commodities failed and modern currencies were created to replace them.
For any currency to gain mainstream acceptance, transportability/transferability is very essential.
If money cannot be moved in an easy and fast manner in a given system, such a currency may fail to have the same demand by residents of a specific country.
In the case of fiat currencies such as the USD, GBP, JPY, AUD, SGD, and CNY, the fiat monies should be transferable between countries via exchanges as well as through cross-border settings.
Aside from its usage externally, currencies must be able to move from one area of a country to the other to support the local economy.
There is no human being who will go out to buy a product with a short lifespan.
That is how humans view currency money.
If a currency is made out of materials that can easily be destroyed, mutilated, or damaged which will see the representative money become unusable after a short period, it will be rejected by residents of that specific country.
This is why the durability of a product that is paid to people for performing a particular task must be prioritized by issuing authorities so that users can confer success on it.
Currency Money that is less susceptible to duplications by third parties due to special features is highly demanded by millions of people.
Unfortunately, if currency money lacks features that are hard to replicate which makes it easy for individuals or groups of people to create fake bills, a particular currency will not be demanded and becomes ineffective.
Great examples of this can be attributed to the creation of fake 100 Canadian Dollar Bills in Quebec and Ontario, Canada in 2001.
To add insult to injury, Canadian police seized $1 million worth of fake $20 bills and arrested four suspects in Trois-Rivieres, Quebec, Canada in May 2012.
Using highly sophisticated materials, the counterfeiters printed a total of $250 million.
Because of this, several retailers in Canada are highly suspicious of the $20 and $100 Canadian bills for the purchase of goods and services.
Most retail outlets have gone to the extent of rejecting the bills.
This means that several citizens have lost faith in some of the denominations as a medium of exchange.
To assess the value of Solana (SOL) as a currency, let us compare the token against fiat currencies in each of the aforementioned categories.
Solana (SOL) Compared Against Fiat Currencies
When Solana officially launched in March 2020 through the Solana Foundation in Geneva, the total supply of tokens was capped at 489,000,000 (489 million) SOL tokens.
After tokens from public and private sales were released to the market, the total supply of SOL in the market stood at 511,616,946 SOL.
To break down the mathematics and technicalities, the current circulating supply of SOL was 314,832,732.31.
Using simple mathematics, the current circulating supply of SOL represents 59.95% of coins taken off the total supply.
This means that more than 40% of SOL coins are left for purchase, which is in the region of 196,784,213.69.
On Tuesday, 30th November 2021, Grayscale launched a New Trust dedicated to the Solana project.
It is called Grayscale Solana Trust and it is now available to eligible individuals and institutional accredited investors.
If Solana continues to see large purchases of the tokens by more institutional investors and individual crypto whales, there is a huge chance that scarcity will take hold of the coins in the not-too-distant future.
Do not forget that Solana relies on the Proof-of-Stake (POS) consensus algorithm which makes it easy for transaction verification and validation to be completed.
As students and consumers of products, we all know what happens to the price of an asset when demand is greater than supply (scarcity).
The approach taken by founders Anatoly Yakovenko and Greg Fitzgerald when it comes to Solana’s supply is different from most fiat currencies.
The global fiat money supply is broken into four categories.
They are M0, M1, M2, and M3.
M0 is the currency in circulation.
M1 is the currency in circulation (M0) plus demand deposits such as checking accounts/transactional accounts.
M2 is demand deposits (M1) plus small-time deposits.
M3 is large-time deposits plus money market funds.
These categories of global fiat money supply can be categorized as mediums of exchange or stores of value.
Checking accounts/transactional accounts/demand deposits and currency in circulation are used by people to go about their daily activities. Therefore, we can categorize M0 and M1 under mediums of exchange.
Small-time deposits and large-time deposits are the two ways of locking up money so that it will appreciate after a given period. Therefore, we can categorize M2 and M3 under store of value.
The supply of currency in circulation is normally controlled through monetary policy by central banks of countries.
This regulatory body ensures that adjustments to the flow of money are made using economic factors.
The same cannot be said for Solana.
Presently, a robust community of cryptocurrency lovers has sprung up all over the internet.
Since the Solana project was built on a Proof-of-Stake (POS) and Proof-of-History (POH), validators contribute computational power to verify transactions relatively faster.
This is different from Proof-of-Work (POW) systems that need application-specific integrated circuit (ASICs) equipment to mine coins.
Therefore, coins are added to the circulating supply daily, but in a controlled manner.
Since no large-cap cryptocurrencies with a fixed maximum supply, with Bitcoin under perspective, have reached a state where the total supply of coins has been taken off the maximum supply, no one knows what will happen if all SOLs are purchased.
With close to 17,100 coins on the market, screaming for the same buyers, the last SOL coin may take a long time to move from the total supply to the circulating supply.
What Trading Education can tell you is that scarcity of SOL tokens will lead to a spike in its market capitalization.
This is highly evident in precious metals such as gold.
Check Out: The 5 Best Ways To Buy Solana (SOL)
Crypto asset investing is highly volatile and unregulated in some EU countries. No consumer protection. Tax on profits may apply.
Fortunately, SOL has the attribute of divisibility.
This means that traders and investors that have read extensively about the possibilities of the Solana crypto project but do not have large sums of money to invest in SOL can buy fractions of the coin in the future.
In such a scenario, more coins of individual units such as 0.43478260 and 0.56521739 will be distributed throughout the economy of cryptocurrencies.
On a larger scale, because cryptocurrencies can be divided into eight (8) decimal points while fiat currencies can be divided into two (2) decimal points, we can say that cryptocurrencies have a larger degree of divisibility than the Dollar, Pounds, or Euro and other fiat currencies.
As a trader or investor who wants to know more about the crypto finance space, you should know that divisibility plays an integral role in how scarce digital currencies such as SOL can become.
Should SOL surpass the price milestones set forth by analysts and experts and test new high highs, holders of the coin can still use their tiny fractions to go about their daily passive income-making activities on the protocol.
One of the biggest selling points of SOL has been its use in settling transactions on the Solana Blockchain (one of the most active smart contracts networks in the space today).
Due to the success of Ethereum and decentralized finance in 2021, smart contracts chains have gained a huge fan base due to their ability in helping their users go about financial transactions in a trustless and decentralized manner.
Since users on the Solana Network do not need to know each other before they can engage in decentralized activities, the founders of the Solana Network added smart contracts to their technology to enjoy the innovative products that can be built on it.
In November 2021, the Solana ecosystem had more than 500 decentralized protocols and applications (DAPPS).
There are totals of 30 wallets, 34 tools, 12 stablecoins, 29 SPLs, 6 SDKs, 1 RPCs, 6 Oracles, 193 NFTs, 49 Metaplexes, 1 Multi-chain, 30 Infrastructure, 4 Investment Fund, 13 Games, 2 Gaming, 8 Governance, 33 Exchanges, 17 Ecosystem Fund, 19 Explorer, 12 DAPPs, 41 DEXs, 12 DAPPS, 116 DeFi, 29 AMMs, 4 Communities, 93 Apps, and 1 Candymachine.
What this means is that all the activities that happen on these applications use SOL since it is the native asset of the Solana ecosystem.
In the long term, SOL will continue to be involved in thousands of transactions daily.
Solana is also active in terms of development activity.
If more DAPPS are built in the ecosystem in 2022 and beyond, you should know that transactions involving SOL will skyrocket.
The resultant effect of this is liquidity on the token and increment of its price on the various cryptocurrency exchanges.
The inception of cryptocurrency exchanges that supports Solana (SOL) such as Binance, eToro, Coinbase, OKEx, Huobi Global, and FTX and wallets such as Exodus, SimpleHold, Solong Wallet, Sollet, Atomic Wallet, MathWallet, Zelcore, Ledger Nano S, D’CENT, Coin 98, and TrustWallet has made it easy to transfer SOL within seconds. The transactions happen regardless of the number of SOL coins involved.
What’s more, the transactions come at a relatively lesser cost.
At the moment, the average transaction cost per transaction for SOL is $0.00025.
In the traditional financial setting that deals with fiat currencies, transferring money from one country to the other can take days. This is a result of the bureaucratic processes involved.
In addition to this, such transactions come with hidden fees since clearinghouses, insurance companies, and central banks must give thumbs up before transactions are fully processed.
Although SOL can be transported, you should know that as of December 2021, there are no physical representations of SOL tokens.
Cryptocurrencies are more durable than fiat currencies. This is because they are not susceptible to physical damages since they only exist as digital assets. Therefore, cryptos are extremely valuable and cannot be easily destroyed like fiat currencies.
The only time crypto tokens are destroyed is in a process called burning. Even with this, the result is scarcity in the token burned which in turn increases the token’s price.
This in no way means your SOL tokens cannot be lost or compromised. Accounts held on cryptocurrency exchanges are custodial. This means that you only have access to the account and not your SOL and entire cryptocurrency holdings. In the case of a cybersecurity threat to your exchange, you could lose your SOL coins.
Aside from this, being a wallet holder is non-custodial. This means that you have access to your account as well as SOL holdings. You will be given private keys (passcodes).
Should you misplace the keys (minimum of 12 words and maximum of 24 words), you should know that your wallet will be locked forever (no matter the size of your holdings).
Despite this, your Solana coins will still be available in the records of the Network.
Unlike paper money that continues to be mired by counterfeiting controversies, Solana and blockchain technologies have steered clear of crypto token duplicates.
Although several attempts have been made to counterfeit cryptos in what is known as double-spending, the Solana Network is proof-of-stake, so this is impossible.
Ordinarily, hackers need to gain 51% computational power.
With proof-of-stake (POS), the Graphic Processing Units (GPUs) and Central Processing Units (CPUs) of personal computers can be used to validate and verify transactions.
Therefore, millions of people are contributing power which makes it difficult for hackers to compromise the Solana Network.
Since hackers must spend time and money to figure out how to counterfeit cryptocurrencies, attempts at hacking are almost unlikely.
This is because the risks involved far and wide exceed the potential rewards that could be obtained from the hacking.
Solana (SOL) Challenges
Many ask the question, what are the challenges facing Solana as a currency?
One of the biggest challenges SOL faces is its acceptance as a store of value.
This is because cryptocurrencies like fiat currencies are representative money. This means they do not have any intrinsic value.
When you consider the fact that SOL returned more than 17,000% in 2021, you should know that it has benefited massively from the crypto bubble.
Since there are bullish days and bearish declines, there is a huge chance that SOL could crash to new high lows in the future.
The future of cryptocurrencies continues to remain uncertain despite the gradual steps they continue to take into the mainstream every day.
Aside from this, cybersecurity issues in the form of exchange hacks have raised suspicions about Solana’s (SOL) utility and transferability attributes.
Due to the unregulated nature of the crypto finance space, traders and investors would not find anyone to hold accountable for the loss of their private keys or SOL holdings on a highly decentralized cryptocurrency exchange.
In addition to these, several countries such as China, India, Japan, and Turkey continue to issue press releases about bans on the use of all forms of digital currencies.
As a result, SOL and other coins are surviving daily with no certainty in the future.
Crypto asset investing is highly volatile and unregulated in some EU countries. No consumer protection. Tax on profits may apply.
Solana (SOL) Worth Versus Rival Fiat Currencies
To place value on Solana, we need to do a projection of the potential of SOLs price based on the possibilities of its thriving ecosystem. The easiest way to do this is to compare the worth of SOL to the United States Dollars (medium of exchange and store of value).
This will help us calculate the value of SOLs projected percentage.
As of September 2021, M1 (Currency in circulation and demand deposits) was $18,115,300,000,000 ($18.1 trillion). This value represents mediums of exchange globally.
M3 (money markets and large deposits) was $20,982,900,000,000 ($20.9 trillion) in the same period.
Precious metal, Gold, also functions as a store of value.
As of Wednesday, 1st December 2021, the market capitalization for gold was approximately $11.353 trillion.
Overall, the total valuation of M3 ($20,982,900,000,000) plus gold ($11,353,000,000,000) equals $32,355,900,000,000 ($32.3 trillion).
Trading Education’s estimate for the global value of (mediums of exchanges) and (store of value) which is M1 ($18,115,300,000,000) and ($32,355,900,000,000) equals $50,471,200,000,000 ($50.4 trillion).
If Solana (SOL) reaches new price milestones such as $5,000 someday, the total supply of SOL (511,616,946) multiplied by the new price will take SOLs market capitalization to $2,558,084,730,000 ($2.5 trillion).
Read Also: Will Solana Make Me Rich In 10 Years
Difficulties Of Valuing Solana (SOL)
The real worth of Solana can be valued with an eye on the long term.
We have to factor in questions such as, how much adoption will Solana achieve as an ecosystem?
Aside from this, how much in trading volume can SOL receive daily to drive up its price?
We cannot do away with risk factors such as more than 5,000 smart contract blockchains providing the same decentralized finance instruments to users for passive income.
With that said, Solana as a decentralized finance-specific blockchain protocol has surpassed several smart contract chains in terms number of DAPPs as well as usage of the ecosystem.
Solana’s ecosystem processes thousands of transactions per second which is in the top 1% of all blockchain technologies in the crypto finance space.
If Solana continues to dominate headlines with crypto whales buying thousands and millions of the coins, see more DAPPs added to its ecosystem, the projected value of SOL could reach at worst Ethereum (ETH) in the short term, and at best, Bitcoin (BTC) in the long term.
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