Solana's SOL Token Faces Downturn Amid Economic Uncertainties and Increased Competition
Summary:
Solana's SOL token faces a 24% decline since June 7, showing a more pronounced downturn than the overall cryptocurrency market. The bearish momentum is expected to continue, potentially driving the price down to $130 or less. Factors influencing this trend include strong performance of the S&P 500 index and higher interest rates posing risks for the U.S. economy. Additionally, increased competition among smart contract-oriented blockchains and comparatively lower staking reward rate for SOL factor into this outlook. Despite potential rallies, experts predict Solana may not top the decentralized application (DApp) network rankings in the near future.
Solana's SOL token, although momentarily reaching $151 on June 16, has marked a 24% decline from June 7. In comparison to the total cryptocurrency market cap that is down 14% during the same span, SOL's downturn seems to be more profound, indicating a greater decline in interest in SOL relative to other cryptocurrencies. A few signals, such as the on-chain activity of the Solana Network and the demand for leveraged positions, hint towards a continuation of SOL's bearish trend. SOL may retest the $130 mark or go even lower if demand stagnates.
One reason for the decreased interest in cryptocurrencies is the steady growth of the S&P 500 index, which peaked on June 17. Rising stock prices, propelled by tech stocks and promising employment and consumer data, hint at potential positive earnings for Q2. Market players anticipate a two-thirds likelihood that the U.S. Federal Reserve will begin reducing interest rates by September.
Despite the high-yielding potential of cryptocurrencies, investors fear the U.S. economic growth could be short-lived due to higher interest rates, posing a higher risk for altcoins such as SOL. Additionally, Bitcoin (BTC) and Ether (ETH) have an advantage with ETF access, attracting more institutional investments.
The future for smart contract-oriented blockchains looks competitive, even if the cryptocurrency market rallies in the near term. A number of applications powered by the Solana Network provide asset bridges to other blockchains, vying for yield, airdrops, liquidity and token launches.
Solana's native staking reward rate is just 1.3% above the SOL token inflation rate, in comparison to Ethereum's 2.8% effective reward rate due to its burn mechanism creating a 0.4% annualized inflation, as per StakingRewards. This direct impact has caused Solana’s total value locked (TVL) to remain under $30 million since May.
Arthur Hayes, ex-CEO and cofounder of BitMEX, predicts that Solana will not be a top-ranking decentralized application (DApp) network within the next one to three years. He believes Aptos is a stronger contender, according to a report by Wu Blockchain without much elaboration. Aptos employs a batch-based transaction processing approach using a sharded architecture.
Beyond competing with layer-1 alternatives, Solana is under increased pressure with the layer-2 ecosystem of Ethereum’s TVL staying above $40 billion. Several blockchains like Arbitrum, Base and Optimism have already outstripped Solana Network when it comes to DApps activity.
A significantly smaller 7-day DApps volume of $589 million is seen with Solana compared to BNB Chain's $4.9 billion and Arbitrum's $9.5 billion during the same time. Solana's decentralized finance TVL, according to DappRadar, is at $1.2 billion, surpassing other competitors like Aptos and Avalanche, but lags behind BNB Chain's $4.9 billion.
To comprehend market sentiment, observing the derivatives markets is advised. Perpetual contracts, or inverse swaps, encompass an embedded rate that's recalibrated every eight hours. A positive rate points to higher leverage by buyers. Over the last week, the funding rate for SOL perpetual futures has remained under 0.01% every 8 hours.
Considering Solana Network's DApp deposits, volumes, and SOL derivatives traders' apathy, there is a likelihood that the SOL price may slide below the $130 support level in the near future.
This article solely expresses the author's viewpoint, and does not serve as legal or financial advice. The opinions here don't necessarily mirror those of Cointelegraph.
Published At
6/18/2024 2:10:00 PM
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