2 New Green Flags for Buying Solana

Key Points

• Blockchains with a bigger capital base tend to attract more users, developers, and investors.

• Solana's capital base is growing, and the growth is coming at the expense of its competitors.

• Its base of stablecoin wealth is also getting significantly bigger.

• 10 stocks we like better than Solana ›

In crypto, capital goes where it is treated best, and that shows up as value moving from one blockchain to another. During the past month, two meaningful slices of value have been heading to one place in particular: Solana (CRYPTO: SOL).

Two green flags indicate the network's growing strength and deeper liquidity, and also better odds that the next wave of on-chain activity accrues to the benefit of Solana holders. So let's take a look at each and understand why they're positive signs for the coin's future value.

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Capital is migrating to Solana

When investors choose a base chain for storing their crypto assets, they effectively end up voting with their dollars, as capital parked on one chain is capital that can't be parked somewhere else.

During the 30 days ended on Sept. 23, Solana saw roughly $2 billion in net inflows from other networks, capturing an impressive 37% of the value of all cross-chain transfers in the process. That's the first green flag.

Importantly, Solana drew the single biggest inflow, sized at $1 billion, from its archrival smart contract chain, Ethereum. It thus stole capital share from Ethereum directly, even as its market cap of $106 billion remained far smaller than Ethereum's $463 billion (as of Sept. 25). The size distinction is key here, because it means that even with Ethereum's far larger decentralized finance (DeFi) ecosystem and stablecoin base, both of which are appealing to holders of large amounts of capital, Solana was still the more attractive place to hold investors' assets.

Furthermore, the flow pattern matters, too, because it is a relative strength signal.

In other words, if people are consciously moving value off rival chains and onto Solana, they are implicitly betting that they can do more with their capital there, whether that is earning yield via staking or decentralized finance (DeFi), accessing decentralized applications (dApps), or reducing the gas (user) fees they need to pay when performing any kind of action on-chain. It's also a network-effect signal, since transaction activity, and thus revenue generated by the projects that users are transacting with, tends to follow liquidity.

The stablecoin base is expanding fast

Crucially, most of the capital flow into Solana is capital stored in the form of stablecoins, which is the second green flag. Stablecoins typically amplify future activity because they are immediately deployable into lending, market making, and payments without taking on any price risk in the interim.

You can see the footprint of the migration on Solana's own stablecoin ledger. During the past 30 days, the market cap of stablecoins circulating on Solana rose by about 12% to roughly $13.2 billion. Recall that even if users are just moving stablecoins onto or around the chain and doing nothing else, they will still need to hold some of the chain's native token, Solana, to pay their network fees, so the volume translates fairly directly into more demand and higher prices.

If capital keeps flowing this way, the near-term result is a thicker order book for Solana's DeFi and payments stack. More app developers are likely to migrate alongside capital, as they will want to offer services to capture a portion of the incoming flows where possible -- and that will bolster Solana's ecosystem even more. The longer-term result is habit formation, wherein users default to Solana first because that is where their working dollars already live.

But as bullish as this setup is, investors should also weigh the other side of the ledger.

There's no law that says Solana will continue to siphon away capital from Ethereum and other networks indefinitely. It needs to continue to offer incentives for capital to set up shop, like favorable staking yields, useful DeFi and dApps that generate value for users and providers alike, facilities for lending and borrowing, and good investment opportunities that can't be found on other chains. Maintaining the chain's high speed and low-cost features is also a requirement for the current trend to continue. Thus, competition remains a major risk that can't be ignored.

Nonetheless, assuming cross-chain inflows remain positive, and that the stablecoin base on Solana continues to grow, its utility and liquidity should compound, making investors richer in the process. This coin is worth buying today, so long as you're willing to tolerate the inevitable volatility and hold it for the next few years to get the full payoff of the trend of shifting capital.

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