Solana: A Bumpy Ride To Recovery

Summary Solana has experienced significant declines in price, user base, and Total Value Locked (TVL) since the 2021 crypto bull run. Recent positive developments and partnerships have fueled a recovery in Solana's sentiment and TVL, with a 61% rise in YTD TVL. Institutional interest in Solana is growing, with inflows of $5.1 million last week, making it the "most loved" altcoin for 2023. Introduction Solana ( SOL-USD ) has witnessed significant declines in price, user base, and Total Value Locked (TVL) since the 2021 crypto bull run. SOL was notably affected by the FTX (FTT-USD) contagion, given that FTX and its founder, Sam Bankman-Fried, were known supporters and early investors in SOL. Investors' interest in SOL has been renewed, suggesting a potential path to price recovery. In the current year, SOL has made strides, surging from its low of around $9 last year to its present value of $23. However, SOL's current price remains far from its 2021 all-time high of $259. In the 2021 bull market, SOL was a top performer. SOL's great performance and popularity at the time can be attributed to the NFT hype of 2021 and SOL's lower NFT minting costs compared to Ethereum ( ETH-USD ). The recent price surge in SOL mirrors the broader crypto market's momentum over the past few days. Yet, the crypto investment community remains divided over SOL's prospects following last month's court order that permits FTX to sell off its crypto holdings, including ~$128 million worth of SOL, to pay back its creditors. Some crypto investors anticipate that the FTX sell-off may exert continuous selling pressure on SOL, while others argue that SOL has the resilience to absorb this pressure. In this analysis, I'll move away from the typical sentiment-driven viewpoints often found in the crypto space and instead focus on key year-to-date (YTD) on-chain data to provide a comprehensive assessment of SOL's current position. A Look at Solana's On-Chain Metrics 2023 has been an overall better year for SOL compared to 2022 when it suffered its biggest black swan yet - the FTX contagion. Let's see some SOL metrics, then examine some recent trend reversals. Solana network's user activity has experienced a steep decline for the past two years (since the 2021 crypto bull run). On-chain data shows a general decline in activity on the Solana network, including a decline in active user wallets, amount of value moved on-chain, non-vote transactions, number of new wallet addresses, and TVL. Solana's users or active wallet addresses fell to a two-year low last month. Solana - Non-Vote Transactions (theblock.co) Solana - Number of Active Wallet Addresses (theblock.co) Solana - Value Moved On Chain (theblock.co) Solana TVL (DefiLlama) A blockchain network's activity typically declines in a bear market. Besides Solana, other Layer-1 blockchain networks, including Ethereum and Polygon ( MATIC-USD ), have also experienced a decline in activity since the crypto market slipped into a bear market in late 2021. The peak crypto market TVL of ~$179 billion recorded on November 9, 2021, has declined by ~78%; currently, the total TVL sits at ~$38 billion. Ethereum and Polygon have both seen ~80% and ~89% decline in TVL, respectively. Beyond the broader market conditions, Solana faced additional challenges due to its association with FTX and the repercussions of the FTX contagion. Solana's TVL, in particular, witnessed a dramatic drop of around 96%, falling from its November 2022 high of ~$10 billion to the current level of ~$335 million. The Trend Reversal So far this year, the tides are turning for Solana sentiment. The coin is in a recovery state, and recent announcements and partnerships have been catalysts for SOL. Solana's TVL hit its YTD high two days ago, sitting at around $338 million. TVL at the beginning of the year was $210 million; compared to the current TVL, SOL has seen a 61% rise in its YTD TVL. Ongoing partnerships are an important factor investors use in gauging a crypto project's prospects. Recent announcements of key partnerships have shaped investor sentiment towards Solana. Early last month, Visa ( V ) announced that it had expanded its USDC stablecoin ( USDC-USD ) pilot to the Solana blockchain. This announcement predictably gave some boost to the Solana ecosystem. Solana 1-Month Social Media Metric (LunarCrush) Per LunaCrush data, the social media mention of Solana jumped by 84% in the past month, since the Visa partnership announcement; social engagements are also up 159%. Another noteworthy partnership that Solana has secured in recent times is the integration of its payment framework Solana Pay with Shopify (ticker). The integration allows millions of merchants on Shopify to utilize Solana Pay for payment processing. Institutional Interest Crypto Assets Inflows (CoinShares) The latest Digital Asset Fund Flows Weekly Report by CoinShares shows institutional interest in Solana. Following a six-week streak of outflows, digital asset investment products saw inflows of $21 million last week. Among altcoins, Solana saw the highest weekly inflows . Besides Bitcoin's inflow of $20.4 million, other altcoins saw outflows; only Solana saw inflows. SOL's inflows this past week are worth $5.1 million, while Ethereum's outflows were $1.5 million. Ethereum has been on a seven-week outflow streak. As a result of the inflows, Solana has been dubbed the "most loved" altcoin for 2023. Risk Now that we've examined Solana's recent resurgence and the positive developments that have fueled its momentum, it's essential to acknowledge the potential risks and challenges ahead. Although I think the worst days are behind for SOL, every cryptocurrency project faces hurdles on its journey, and Solana is no exception. Solana's Network Outages Solana has faced network outages in the past, which have raised concerns in the crypto community. These network outages were mainly due to network congestion, software bugs, or problems with specific validators. This year, there have been fewer network outages compared to the previous year. The last reported outage was in late February, and in Q2, the network achieved a 100% uptime record. While this uninterrupted uptime is positive news, in my view, this might just be a result of lower activity on the Solana network during this period. This raises the possibility that network outage issues could resurface if the network experiences a surge in activity similar to previous peak periods. Takeaway Solana faces both challenges and opportunities as it strives to regain its momentum in the cryptocurrency space, with recent positive developments and institutional interest shaping its path forward. Regarding the FTX selloff, reports reveal that the FTX liquidation of crypto assets, including SOL, will be done in weekly batches and will be handled by an investment adviser Galaxy Digital. Therefore, this will likely have very little impact on SOL's price. I give Solana a hold rating because it is worth a hold for crypto investors who already have the coin in their portfolio. Investors who don't have SOL in their portfolio yet but seek to buy SOL might consider monitoring the markets, as they could see a lower entry price sometime soon. In the run-up to the Bitcoin halving, Bitcoin dominance typically increases and alts lose momentum for a while; therefore, I believe a better entry for SOL is imminent.