Key takeaways
- Solana is often referred to as a “high-beta Bitcoin” because it mirrors Bitcoin’s price movements with amplified volatility.
- Unlike Bitcoin’s energy-intensive proof-of-work (PoW), Solana uses a combination of proof-of-history (PoH) and proof-of-stake (PoS).
- Solana’s rapid transaction speed and low fees make it ideal for DeFi and NFT applications, positioning it as a strong competitor to Ethereum.
- While Bitcoin is seen as a stable, long-term store of value, Solana’s high-beta nature offers high growth potential but comes with increased volatility.
Solana (SOL), often dubbed a “high-beta Bitcoin,” mirrors Bitcoin’s (BTC) price movements but with amplified volatility. While Bitcoin relies on the proof-of-work (PoW) model, Solana combines proof-of-history (PoH) and proof-of-stake (PoS) to deliver faster, more efficient transactions. This design enables Solana to thrive in high-demand areas like decentralized finance (DeFi) and non-fungible tokens (NFTs), making it a compelling choice for investors seeking higher growth potential despite its increased risks.
This article explores why Solana is called a high-beta Bitcoin.
Why is Solana “high-beta?”
In finance, “beta” measures an asset’s volatility, essentially how much its price moves in relation to the overall market.
If an asset has a beta above 1, it’s generally more volatile than the market. For example, if BTC has a beta close to 1 (indicating it often moves with the broader market), assets like SOL are often above that, meaning they tend to react more strongly to market changes, making them “high beta.”
High-beta assets can offer high rewards, as they may see rapid price surges in strong markets; however, they’re also riskier, often dropping faster than low-beta assets in downturns.
In the crypto world, Solana is often called a “high-beta Bitcoin” due to its tendency to move in sync with Bitcoin — but with amplified reactions. When Bitcoin goes up, Solana often goes up more; when Bitcoin drops, Solana’s drop tends to be steeper.
Arthur Hayes, former CEO of BitMEX, has recently highlighted this in an Unchained podcast:
“I will trade SOL as we enter the election period. I want quick movements due to its high beta against Bitcoin, knowing it will rise when Bitcoin performs well…”
Did you know? The concept of using high-beta assets as market sentiment indicators emerged in the latter half of the 20th century, particularly in the 1970s and 1980s. This period saw increased interest in market behavior analysis following the development of the Capital Asset Pricing Model (CAPM) in the 1960s, which introduced beta as a measure of an asset’s risk relative to the market.
Key differences between Solana and Bitcoin
- Transaction validation: One of the biggest differences between Bitcoin and Solana lies in how they validate transactions. Bitcoin uses PoW, where miners perform trial-and-error operations to confirm transactions. This system is secure and decentralized, but it’s also slow and energy-intensive. Solana, on the other hand, combines PoH with PoS, allowing it to validate transactions at lightning speed with much lower energy use. PoH timestamps transactions, creating an efficient and fast sequence, while PoS incentivizes tokenholders to participate in validation, making Solana a more scalable option.
- Speed: In terms of speed, Bitcoin processes about seven transactions per second (TPS), making it relatively slow. This limitation often results in high fees and congestion during peak times. Solana, in contrast, is built for speed and can handle around 65,000 TPS under ideal conditions. This difference means Solana can support high-demand applications, like DeFi platforms and NFT marketplaces, without the same bottlenecks Bitcoin experiences.
- Tokenomics: Bitcoin has a fixed supply cap of 21 million coins, which has helped drive its reputation as “digital gold” with a predictable, deflationary structure. Solana, however, operates on a dynamic inflation model that supplies new SOL tokens over time, initially set at about 8% annually with plans to gradually decrease to 1.5%.
Did you know? Anatoly Yakovenko, Solana’s founder, previously worked at Qualcomm, where he developed systems for synchronizing time across global networks. This experience led him to create PoH, allowing Solana to timestamp transactions and process them without waiting for block confirmations.
A volatility comparison between Solana and Bitcoin
Bitcoin, despite its volatility, has developed a reputation for relative stability within the crypto market. Solana, meanwhile, is known for even higher volatility. Data from recent price trends shows that Solana tends to experience more dramatic price swings than Bitcoin. There are two main reasons for this:
- Market maturity: Bitcoin is well-established, with a larger, stabler base of investors. Solana, being newer, is more susceptible to sharp price fluctuations as it grows and adapts.
- Liquidity and trading volume: Bitcoin’s trading volume far exceeds Solana’s, which helps dampen its volatility. With fewer SOL tokens traded daily, large buy or sell orders can have a greater impact on Solana’s price, making it more responsive — and often reactive — to market sentiment.
These differences make Bitcoin a stabler, more long-term store of value, whereas Solana appeals to those seeking high-growth potential, albeit with higher risk.
A glimpse at Solana’s growth
Solana, as of November 2024, is the fourth-largest cryptocurrency by market capitalization, and it’s not by chance that it’s made it here.
Unique features and innovation
Its unique consensus mechanism allows Solana to achieve transaction speeds of up to 65,000 TPS, significantly outpacing most other blockchains, including Ethereum and Bitcoin. This has had a knock-on effect, creating snowballing growth:
- Speed, combined with low transaction costs, is fueling growth across a wide range of projects, particularly in DeFi and NFTs. Notably, major DeFi platforms such as Serum, a decentralized exchange, and Raydium, a liquidity provider, have chosen Solana as their backbone to leverage its transaction capabilities.
- Solana’s developer community is one of the fastest growing in crypto, with 3,300 active developers as of late 2024.
- In the NFT space, Solana has also gained significant traction. Magic Eden, one of the leading NFT marketplaces, operates on Solana, allowing users to buy, sell and trade NFTs with minimal fees and fast transaction times.
Additionally, projects like Audius, a decentralized music streaming platform, are using Solana to empower artists by minting music-related NFTs, providing new revenue streams for creators and unique experiences for fans.
This is also an ecosystem in flux, developing and improving its blockchain with time. For example, one of Solana’s most recent innovations is the introduction of compressed NFTs. Using state compression technology, Solana can significantly reduce the cost of minting and storing NFTs, making them more accessible to creators and collectors.
Indeed, traditional NFTs often require a lot of blockchain space, which drives up costs, but compressed NFTs reduce data requirements and, by extension, storage costs. This advancement lowers the barrier for creators, making Solana an attractive choice for NFT projects seeking scalability without high overhead costs.
Growth in numbers
While Solana’s price has fluctuated due to its high-beta nature — often moving in exaggerated sync with the broader market (especially Bitcoin) — its long-term growth potential is evident.
Analysts view Solana as one of the few networks capable of competing with Ethereum in terms of DeFi and NFT adoption. Given the ecosystem’s expansion and continuous innovation, many investors see Solana as both a growth and speculative asset, expecting it to capture an increasing share of the blockchain market as its applications and adoption grow.
Did you know? As of November 2024, Solana’s monthly active addresses have surged to 138 million, marking a significant increase from approximately 13.8 million at the beginning of the year.
Investment considerations: Solana vs. Bitcoin
Bitcoin, often seen as the “digital gold” of crypto, has established itself as a relatively stable, long-term store of value in an otherwise volatile market.
Solana, however, offers a different value proposition. Known for its high-beta nature, Solana has shown an ability to deliver substantial returns but also exhibits higher price volatility than Bitcoin.
So, for investors seeking stability, Bitcoin’s slower, steadier growth and larger market cap might be a safer choice. Its lower beta makes it less responsive to market fluctuations, reducing downside risks compared to more volatile assets like Solana.
Meanwhile, Solana’s high-beta profile presents higher potential returns but also greater risk. Investors should be prepared for more pronounced price swings and weigh Solana’s promise of high growth against its elevated volatility.
Adding Solana to a portfolio that includes Bitcoin could be a smart diversification strategy, as the two assets serve different purposes.
Finally, always “DYOR” and never invest more than you can afford to lose, as financial markets — and cryptocurrencies in particular — are inherently unpredictable. It is crucial to stay informed, manage risk, and remember that no investment is a guaranteed win in this volatile space.