Why is Solana (SOL) down 9% this week?
Solana's native token SOL (SOL) experienced a 22% drop in eleven days after reaching $126.30 on December 25, 2023. Some analysts may argue that the bullish momentum continues, as the current price of $98.40 is a 61% gain from the past. month. However, crypto traders are quick to shift their portfolios when better opportunities arise. Investors are now asking for confirmation that Solana Network activity is dampening sentiment for SOL token value.
Some analysts attribute the SOL rally to the airdrop that entered the network after the newly launched JITO token was listed on major centralized exchanges on December 7, 2023, gaining over $300 million in market capitalization in the first few hours. This success was followed by the BONK memecoin on December 14, 2023, which led to the sale of the Solana Saga phone as some of the airdrops were targeted at mobile phone owners.
However, the momentum is fueled by a significant increase in Solana's decentralized applications (DApps) ecosystem. This is despite several competing blockchains experiencing disruptions due to increased activity in December 2023, including Arbitrum, zkSync and BNB Chain.
After the initial rush for Solana SPL tokens dropped 40%, 41% and 44% for Jito (JTO), DogWifHat (WIF) and BONK respectively, investors are asking if there is anything else to support SOL's $42. It makes it the fourth largest cryptocurrency excluding stablecoins.
Examining Solana's Total Value Locked (TVL) it becomes clear that demand is slowing, although not yet alarmingly so.
Solana;sTVL, in terms of SOL, reached a deposit of 15.4 million SOL on December 19, 2023, but experienced a 17% decline to 12.8 million SOL on January 5, 2024.
On a positive note, the current TVL shows a 13% increase from last month. In comparison, BNB Chain's TVL has decreased by 12% in BNB terms over the same period, while Avalanche Network's has decreased by 8% in AVAX terms.
To better assess the impact of the SOL token's 9% weekly drop on Solana network demand, one must analyze activity in terms of DApps volume and active addresses.
Solana's declining activity in the seven days prior to January 5, 2024, is highlighted in terms of active addresses and volumes. Moreover, Solana's market share is 2.6%, which does not put it in direct competition with more established blockchains such as Ethereum or BNB Chain.
Additionally, demand for Solana's DApps is across all sectors, including decentralized finance (DeFi), liquid staking, gaming, social networks and NFTs. For example, leading decentralized exchange (DEX) Jupiter Exchange experienced a 26% drop in volumes on a weekly basis, while NFT marketplace Magic Eden saw a 24% drop in active addresses.
Related: Why Is Bitcoin Price Down Today?
Traders who have covered the three most important areas of network use should now analyze how retail investors have been affected by recent price action. Perpetual contracts, also known as reverse swaps, typically include an embedded rate calculated every eight hours. Positive funding indicates an increase in leverage among long positions.
The latest data shows that funding is less than 0.02% in eight hours, which is equivalent to 0.3% per week, which is not useful for most traders. This is in stark contrast to the 1.7% per week paid to take advantage of longs (buyers) on January 2nd, indicating that excess demand no longer exists. It's worth noting that the support level remained positive on January 5th when SOL fell below $100, erasing the gains from the previous two weeks.
Given the weakness in Solana DApps activity and declining adoption, investor appetite for SOL appears to have intensified. Perhaps a new wave of airdrops will hit the market and stimulate more demand, but the recent 9% correction seems to be in line with the decrease in demand for the Solana network.
This article does not contain investment advice or recommendations. Every investment and business activity involves risk, and readers should do their own research when making a decision.
