Should You Buy Polkadot While It's Under $10?

Key Points

• Polkadot’s “parachains” operate as independent states tethered to a single blockchain.

• That flexibility makes it a popular choice for developers.

• But it could be overshadowed by similar platforms like Ethereum and Solana.

• 10 stocks we like better than Polkadot ›

Polkadot (CRYPTO: DOT) has taken its investors on a wild ride over the past five years. It started trading at $2.90 on Aug. 20, 2020, skyrocketed to an all-time high of nearly $55 on Nov. 4, 2021, but now trades at less than $4.

Like many other smaller altcoins, Polkadot fizzled out as rising interest rates drove investors toward more conservative investments. However, some bullish analysts still expect its price to more than double to $10 by the end of this year. Let's see if that's possible.

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How does Polkadot differ from other cryptocurrencies?

Polkadot initially attracted a lot of attention because it was created by Gavin Wood, one of the founders of Ethereum. Just like Ethereum, it uses an energy-efficient proof of stake (PoS) blockchain to validate its transactions.

That means Polkadot's tokens can only be staked (locked up for interest-like rewards) instead of mined like Bitcoin, which uses the more energy-intensive proof of work (PoW) mechanism. There are 1.61 billion Polkadot tokens in circulation today, and it's an inflationary token that increases its supply by roughly 10% every year.

Therefore, it can't be valued by its scarcity, like Bitcoin, which is a deflationary token with a maximum supply of 21 million tokens. Instead, it's valued by the growth potential of its developer ecosystem.

Like Ethereum, Polkadot supports smart contracts, which are used to develop decentralized apps (dApps), non-fungible tokens (NFTs), and other tokenized assets. But unlike Ethereum, which natively supports smart contracts on its Layer 1 blockchain, Polkadot doesn't run smart contracts on its core Relay Chain. Instead, it runs those contracts on its parachains --stand-alone blockchains built on top of its native Relay Chain.

How do Polkadot's parachains work?

Polkadot's Relay Chain only handles security, validation, and cross-chain communication features. Its parachains -- which each operate independently with their own logic, governance, and tokenomics -- rely on its Relay Chain for those shared fundamental services. So if parachains are sovereign states, the Relay Chain is the federal government.

The parachains can also work with a wide range of incompatible blockchain networks, which makes them a flexible option for developers creating cross-chain dApps and tokens. Those parachains can also communicate with one another through cross-chain messaging tools.

By comparison, Ethereum's developers can drive their transactions through its Layer 2 blockchains, which are built on top of its Layer 1 blockchain but don't operate independently. Ethereum's Layer 2 blockchains (like roll-ups) are often used to process its Layer 1 transactions at a faster rate by bundling them together.

What are the bull and bear cases for Polkadot?

Polkadot's bulls believe the flexibility of its parachains will attract more developers than other monolithic PoS blockchains. For example, its Moonbeam parachain supports EVM (Ethereum Virtual Machine) smart contracts, its Phala parachain is geared toward privacy-focused apps, and its Acala parachain acts as a hub for decentralized finance (DeFi) apps.

As those parachains mature, Polkadot could evolve into a multi-sector ecosystem instead of a single-chain one. That expansion could drive the token's price higher.

The bears will claim that Polkadot's parachains still aren't gaining enough momentum against bigger PoS blockchains like Ethereum. That's probably because its developers must bond (lock up) large amounts of DOT tokens to reserve slots in its parachains. Ethereum, Solana, and other popular PoS blockchains don't require that kind of investment. Polkadot also lacks Ethereum's broad developer appeal, Solana's raw speed, or other standout features.

The crypto's "federation of chains" strategy is innovative, but all of those chains are exposed to potential attacks on their shared Relay Chain validator. Ethereum's Layer 2 blockchains use a broader range of validators, so they're less susceptible to single concentrated attacks.

Is it worth buying Polkadot while it trades below $10?

Polkadot, like Ethereum, is valued by the size of its developer ecosystem. In 2024, Polkadot had 17,123 commits (updates) on Github. That only puts it slightly behind Cardano and Ethereum, which ended the year with 21,143 commits and 20,752 commits, respectively. Those ongoing updates indicate there's a lot of pent-up interest in building apps on Polkadot's parachains.

But its inflationary nature makes it tough to value, and investors might stick with more firmly established blue-chip cryptocurrencies like Bitcoin and Ethereum instead of taking a chance on Polkadot. So instead of soaring to $10, I believe it will trade sideways or slip lower in this volatile market. It might find fresh ways to break out of its niche, but that would surprise me.

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Leo Sun has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bitcoin, Ethereum, and Solana. The Motley Fool has a disclosure policy.