Dogecoin and Solana Share This 1 Problem. Should You Avoid Them?

If supply of an asset rises faster than demand for it, price tends to sag, and cryptocurrencies are no exception. Some with loose supply policies can add new coins forever, severely diluting anyone foolish enough to hold them over time. Others opt for a controlled drip of new supply, or for a strict policy of allowing no new supply to ever be created.

Either way, buying the cryptocurrencies with an expanding supply requires investors to ask themselves if there will consistently be enough real demand to soak up the issuance. That brings us to Dogecoin (CRYPTO: DOGE) and Solana (CRYPTO: SOL), both of which consistently increase their circulating supply over time by design, which can weigh on returns if adoption stalls. The pair have faced criticism from investors, and so it's natural to ask whether either of them is worth investing in.

Let's check it out and see how much an increasing supply really matters.

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Same problem, different math

Dogecoin mints a fixed 10,000 coins for each block. That pencils out to about 5.2 billion new coins per year, with no hard cap. There are 151.4 billion coin outstanding.

The meat of the issue for investors is the percentage increase implied by that issuance. With 5.2 billion new coins per year, this means roughly a 3.6% annual increase in supply. That rate will decline slowly over time only because the base keeps getting larger. But, on its face, that figure doesn't imply that long-term holders will get completely wiped out, as (in theory) it's feasible for even a meme coin to consistently grow by more than 3.6% per year.

Solana's design is different per its tokenomics. It launched with an 8% annual supply growth rate that was set to decay by 15% per year until it reaches a long-term rate of 1.5%. In other words, the percentage gets smaller on a predictable schedule.

In practice, the current estimated annual Solana growth rate sits at 4.2%, and is still set to step down annually per the aforementioned decay rate. Growing by more than 4.2% isn't a very big hurdle for a leading smart contract chain to surpass annually on a long-term basis. So there's no red flag here.

Nonetheless, Solana and Dogecoin do not have equal chances of outgrowing their respective supply growth rates, so let's probe a bit further.

Lean in selectively

Dogecoin doesn't exactly have a mechanism to ensure that demand for its coin will be higher in the future than it is right now. It's a meme coin.

Its chances of gaining value are linked to market sentiment and whatever hype is built around its price rising. Therefore, it's hard to see how it could have good odds of its price rising more than its growth rate, though for the record, it has tended to during the past few years anyway. The takeaway is that without a real mechanism for generating value, the supply growth it is certain to experience is hard to justify from an investment risk standpoint.

Solana's situation is very different, as it's an entire blockchain and not just a coin. The chain supports a large decentralized app (dApp) ecosystem that constantly generates fees and significant usage, both of which are signs of real economic activity that can scale with time and make holders richer via clearly defined mechanisms like coin burning, among others.

During the past year, Solana ranked near the top in cumulative user fees among major networks, generating $986.3 million. Other important operational metrics like active wallet addresses, transactions, and decentralized exchange (DEX) volume also look robust, which helps explain why developers and liquidity keep showing up.

There is also a new on-ramp for demand. On Oct. 17, the first U.S. spot Solana exchange-traded fund (ETF) ETF got approved by the Securities and Exchange Commission (SEC), and a few more might be on the way soon. That kind of regulated access tends to broaden the potential investor base, which can help offset issuance as more long-term capital arrives.

So, while it probably makes sense to avoid Dogecoin, including for reasons unrelated to its supply dynamics, Solana is still very much worth buying and holding, and its supply growth shouldn't be a major concern. Given the new capital that's likely to flow in via the ETFs, and its thriving ecosystem, it's simply hard to see how it could lose out to its growing supply over the long term.

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