Solana's rise is due to strong overselling
Solana is showiing excellent movement in 2023, with a 227% increase to $22.90. But investors must be cautious because this rise is mainly due to technical factors.
Solana started 2022 with a drop in capitalisation, facing a traditional series of failures in January, some of which ended in a complete shutdown. But users and developers have embraced this feature, focused on its low transaction costs and transaction speed.
The real shock came from FTX, whose collapse exposed the close business ties between the crypto exchange and Solana. Some experts believe that SOL was one of several coins artificially pumped (inflated in price) by Alameda Research.
In just a few days after the crypto exchange fiasco, SOL lost threefold, and there were so many people wanting to sell that the funding rate for perpetual futures contracts fell below -5% on individual crypto exchanges.
In late December, Vitalik Buterin supported the developers, and the subsequent rise of the cryptocurrency market played havoc with the bears. A slight price increase led to the collapse of protective orders, pushing the coin even higher. As a result, sellers lost $58 million in the first two weeks of the year.
Meanwhile, FTX and Alameda hold 11% of SOL's total supply, or 58 million coins worth $1.3 billion. When the court proceedings are over, the liquidation commission will start selling them off to cover investors' losses. Even if these assets are gradual sold off in the next five years, a high price pressure risk will likely remain.
Another long-lasting factor is the declining trust in the network. The scandal over the FTX connection has led to the exit of the two biggest Solana-based NFT projects: DeGods and y00ts. If other developers follow, the network will be forgotten. The number of active developers and daily users has already halved in the last six months.
SOL's 2023 rise is due to strong overselling. A similar oversupply situation in the stock market is called a Short Squeeze. With that said, Solana's long-term prospects remain dim for objective reasons.
StormGain Analytics Team
(a cryptocurrency trading, exchange and storage platform)