Solana (SOL-USD): It’s Worse Than Just FTX Contagion

Your entire cryptocurrency house has been largely in freefall over the past a number of days. Whereas declines have been massive and widespread, one of many greatest drawdowns has been within the native coin of fashionable Layer 1 blockchain Solana (SOL-USD).

Whereas many of the cash within the prime 10 by market cap have seen 10-25% declines over the past 7 days, Solana has a 6 day haircut of 45% on immense quantity as of writing; and that is after a sizeable relief rally that has seen the coin transfer up from $12.37 Wednesday to just about $19 at yesterday’s intraday peak.

Why the chaos?

What has pushed the coin over the cliff this week after what was truly a fairly good technical setup heading into the weekend was the information that crypto trade FTX was coping with solvency issues. I coated that saga intimately on Tuesday and you may learn about it here. However the level that is seemingly most related to this text is FTX founder Sam Bankman-Fried’s different firm Alameda Analysis had a SOL place higher than $1.1 billion in line with a leaked copy of the corporate’s stability sheet.

When phrase received out that Alameda Analysis had a large place in FTX Token (FTT-USD), there was promote stress on FTT from Binance (BNB-USD) founder Changpeng Zhao, and Alameda was pressured to defend its FTT place by promoting off different property; Solana included. Solana and FTX do have a historical past because the trade is constructed on Solana’s blockchain and Bankman-Fried was additionally an investor and really bullish the token in August:

After all, SBF will not be completely neutral as he has invested within the Solana network-either by way of his firms or straight. Alameda Analysis, a buying and selling store based by Bankman-Fried, participated in a $314 million funding round for Solana Labs in June 2021. He’s additionally building Serum, a decentralized exchange, on Solana.

With the collapse of FTX, the stress on Solana developed very quickly as value fell from $38 to the low teenagers in lower than per week. A lot of this was seemingly triggered by Alameda Analysis and Sam Bankman-Fried dumping no matter Solana they may. However the decline in SOL’s value was seemingly additionally from the remainder of the market merely anticipating Alameda’s continued promoting of its very massive SOL place.

The issue for Alameda on the time was that 75% of the corporate’s SOL was locked in stake and could not instantly be liquidated. Within the addition to what the corporate has already offered, it’s speculated that the corporate nonetheless has over 19.5 million SOL that many consider might be dumped available on the market when the withdrawal from stake is finalized.

If these accounts which were attributed to Alameda do certainly promote the SOL at market, it might be roughly $332 million in Solana that should discover a new residence. That might be an incredible quantity of promoting stress by a enterprise that’s with out too many different choices. It might in principle set off a backside, however I am truly not too certain.

Unhealthy community traits

It could be simple to level to the market carnage brought on by Alameda Analysis and FTX and say now’s the time to purchase Solana as a result of pressured promoting by Alameda will finally come to an finish, however the actuality is the community metrics have been very poor on Solana for a couple of months now. The true quantity as measured by Messari has been declining all yr.

That is indicative of a normal lack of curiosity within the chain. A few of these quantity declines may be attributed to the collapse in NFT patrons and gross sales that occurred in mid-October.

You’ll be able to see a robust pattern of upper highs and better lows in NFT patrons all through many of the final yr on Solana. This was one thing that hasn’t been seen on all chains this yr. As an example, distinctive NFT patrons on Ethereum (ETH-USD) peaked in February. Solana’s peak occurred in September and basically collapsed quickly after. Whereas patrons on Solana had been typically very excessive, the gross sales figures themselves have not been overly spectacular since early summer season.

The DeFi footprint for Solana has been very regarding many of the yr. Even when adjusting Solana’s TVL determine from {dollars} to SOL, at roughly 33 million cash the TVL is down greater than 50% from its peak again in June. For comparability, Ethereum is off a bit below 23% from its January peak when measured within the native forex. The primary takeaway from this part is that Solana’s on-chain metrics have turn out to be fairly poor.

Abstract

Solana is a coin that I’ve had a typically favorable outlook on for awhile however I am in a short time dropping conviction within the thesis. I might actually entertain simply getting out of this one and ready for the mud to settle. However I’ve handled Solana as a staked asset within the BlockChain Response portfolio and I’ve determined to un-stake these funds whereas I resolve what to do with them long run. I do not presently plan to promote however that might actually change. I want to see a number of the on-chain metrics like TVL and transactions enhance significantly earlier than I would entertain shopping for this monumental decline.

The truth is there’s an unimaginable quantity of competitors for quick, excessive throughput Layer 1 blockchains and I feel we’re attending to the purpose the place Solana is operating out of probabilities. The community has a poor historical past of stoppages and has seen key exercise metrics come effectively off highs even earlier than the FTX-related collapse in value. I feel Solana’s connection to Sam Bankman-Fried and the FTX trade is simply the newest instance of dangerous PR for the community. I am not going to name it a promote after such a large decline over the past week as a result of a variety of that promoting stress was an try and front-run Alameda, however I am not ready so as to add to my place both. For now, Solana is a maintain.