1 Big Reason Solana Could Outperform Ethereum for Years

The battle between rival cryptocurrencies Solana (CRYPTO: SOL) and Ethereum (CRYPTO: ETH) is heating up, and, at least for now, it seems the latter coin is on the back foot.

What's more, there's at least one big reason to believe that Solana has a lasting advantage.

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The gap in sentiment is grounded in fact

Like it or not, over the short term, markets move based on sentiment rather than fundamentals. On that note, Ethereum is currently plagued by absolutely awful sentiment. Sentiment around Solana may not be great, but it's sunny in comparison. And given how sticky these sentiments have been during the past year or so, they could be sufficient to power Solana's returns higher than Ethereum's for years.

In one way, that's a silly reason to expect Solana to excel. After all, its price is down about 34% during the past 12 months, a decline that isn't much better than Ethereum's 46% plunge. During the past two years, however, the picture is a bit clearer, with Solana climbing more than 500% and Ethereum gaining just 6%. As a group, investors are unlikely to be very enthusiastic about loading up on either coin right now, incorrect though they are to fixate on short-term price action when considering a long-term investment.

The deeper issue here is that Solana's outperformance relative to Ethereum isn't caused by sentiment alone; it's caused by the fundamental factors that shaped sentiment in the first place. Specifically, Solana is simply a much faster and less expensive chain to do transactions on than Ethereum. That makes the chain an easier place to develop, use, and invest in decentralized finance (DeFi) applications, as well as every other potential type of project in the two ecosystems.

When developers, users, and investors are all on the same page about which chain is their preferred place to do business, it creates more demand for the chain's main coin, which is Solana in this case. On the other hand, when they decide that their needs aren't being met, they filter out by selling their coins and tokens, depressing the value of the place they're quitting, which is Ethereum. Once they leave, they are unlikely to return even if the factors that pushed them to leave are no longer relevant (because of technology updates, for example). And in Ethereum's case, even tech upgrades haven't made its speeds as fast or its fees as low as Solana's.

That is probably not going to change even with the new upgrade, called Pectra, that's in the works for Ethereum. A few upgrades from now, the picture could change. But given the chain's development cycle timelines, with a major update once every year and a half or so, it may not ever recover its former momentum, even if the price of the coin increases quite a bit.

Don't discount inertia

Ethereum is a coin with a $230 billion market cap, which is significantly larger than Solana's $64 billion. Therefore it is not likely that Ethereum will be supplanted by the smaller coin anytime soon, as painful as the next few years may be for holders. That doesn't mean you should buy it, just that it will survive for long enough for its technology development strategy to play out and potentially turn the tide.

Until then, capital will probably continue to flow from Ethereum to Solana, and fresh capital will likely preferentially flow into Solana for the next few years. Expect that trend to continue for as long as Ethereum's image and technical problems persists. At the same time, do not expect it to persist forever.

Eventually the pessimism surrounding Ethereum may become unjustifiable, given its valuable qualities (like its smart contract infrastructure, for example). The price could rebound, delivering a tidy return to those who invested in it when times were bad. But at the moment, there's simply not much reason to buy it rather than Solana.

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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.