1 New Reason to Buy Solana Right Now, and 1 Reason to Be Cautious

As of Oct. 17, the Securities and Exchange Commission (SEC) has cleared the launch of the first U.S. spot Solana (CRYPTO: SOL) exchange-traded fund (ETF), from asset manager 21Shares. With other ETF approvals likely on the way, there's now an easy way for mainstream investors to buy and hold the coin, and it's likely going to bolster Solana's price, which means there's a brand new reason to purchase some.

But, if history is any guide, there's also a little bit of a cloud in this silver lining, so investors need to be slightly cautious at the moment.

Image source: Getty Images.

This is a fresh bridge for Wall Street's capital to enter

The point of the new ETF is that it allows the vast sums of capital in brokerage and retirement accounts to get exposure to Solana. In the long run, that could drive significant returns, especially if the group of investors buying the ETF will be willing to hold on to it with more patience than the crypto natives.

Solana's market cap is $104 billion, so picking up a few billion of inflows at the margin could be fairly impactful to its price in pretty much every time frame. In other words, if you've been interested in buying this coin to benefit from its growth stemming from its decentralized finance (DeFi) ecosystem, its decentralized exchanges (DEXes), its meme coin casino, or other crypto projects, there's now a convenient way to do that without actually touching any crypto wallet directly. For some investors, that ease of access is going to be the thing that makes the difference and causes them to start a position, which is (obviously) bullish for those who hold it today.

Also, getting an ETF is a very clear mark of validation of Solana as a core crypto asset. That's another piece of evidence to support the investment thesis for buying it.

Because regulators have blessed it, big banks and financial institutions will be less reluctant to allocate capital to the coin and to its ETF. Moreover, the ETF tightens the connection between the coin and the traditional financial system, which should in theory help more capital to flow to its ecosystem projects as well, providing fuel for the growth flywheel. When crypto developers are thinking about where they want to build their decentralized applications (dApps), Solana will thus be closer to the front of their minds, as it's more likely to consistently have the liquidity and large sums of capital seeking a yield, which make for big valuations and financially successful projects.

Why patience and caution are key

As good as all of the above sounds, history says the price impact of crypto ETF approvals is usually underwhelming at first relative to investors' (inflated) expectations, and that's a reason to be cautious about buying it right now.

After U.S. spot Bitcoin ETFs launched in January 2024, prices surged to records and then whipsawed right back again as capital flows, profit taking, and macroeconomic events played tug-of-war with the price. The first few months of the ETFs being on the market weren't anything to write home about, though monthly net inflows on the order of $1 billion or more were fairly consistent throughout that early period. But the coin was already in a strong uptrend before the approval, perhaps in anticipation of it, so while the ETF was certainly a driver of higher prices, it's difficult to determine whether the actual capital flows or the boost in sentiment was the factor more responsible for the gains that followed.

Ethereum's path was significantly bumpier, and it's probably the better example to follow to predict Solana's behavior from here. The first Ethereum ETFs were approved in May 2024; approval headlines brought some significant volatility that was ultimately to the downside, and the market needed about five months and subsequent catalysts related to upgrading the chain's technology before the price recovered from its lows. There simply wasn't much in the way of capital flowing in via the ETFs for their first year on the market. Only a year after the ETF approvals did significant inflows start, sending the price of Ethereum up out of its doldrums.

So what's the right move here with Solana?

Maintain cautious optimism, not high hopes. Don't forget that an ETF can be either ignored or sold if investors aren't confident in the direction that the coin or its chain are going.

Solana is an asset that has a long runway for growth, and the ETFs will pave some of the way, but there's still a lot that needs to continue going right in terms of its fundamentals for its price to rise.

Alex Carchidi has positions in Bitcoin, Ethereum, and Solana. The Motley Fool has positions in and recommends Bitcoin, Ethereum, and Solana. The Motley Fool has a disclosure policy.