Despite a brief rise to $151 on June 16, Solana’s native SOL token has experienced a 24% correction since June 7. This underperformed the overall cryptocurrency market capitalization, which fell 14% over the same period.
This means that Solana (SOL)’s problems are more pronounced than the overall market’s decline in interest in cryptocurrencies.
Several indicators, including on-chain activity on the Solana network and demand for leveraged positions, indicate that SOL’s bearish momentum is likely to continue. If demand remains flat, we could see a retest of sub-$130 levels.
SOL Price Could Suffer Due to ETF Shortage
Part of the decline in interest in cryptocurrencies can be attributed to the strong performance of the S&P 500 Index, which hit an all-time high on June 17.
The stock market rally was led by technology stocks, while recent employment and consumer data point to a positive second-quarter earnings report. Investors also see a two-thirds chance that the U.S. Federal Reserve will begin cutting interest rates by September.
Despite the high potential of the cryptocurrency market, investors are concerned that high interest rates may prevent the U.S. economy from maintaining growth for much longer. This risk is especially burdensome for altcoins like SOL, as Bitcoin (BTC) and Ethereum (ETH) have preferential access to institutional funding through exchange traded funds (ETFs).
Even if the cryptocurrency market experiences a rebound in the coming months, smart contract-centric blockchain competition will remain fierce. Several apps running on the Solana Network provide asset connectivity to other competing blockchains through yields, airdrops, liquidity, and token launches.
Solana’s default staking reward rate is 1.3% higher than the SOL token inflation rate. In contrast, Ethereum offers an effective reward rate of 2.8% due to its burn mechanism, with an annual inflation rate of just 0.4%, according to StakeRewards. This has a direct impact on Solana’s total value locked (TVL), which has been stagnating below $30 million since May.
BitMEX co-founder and former CEO Arthur Hayes predicts that Solana will not become a top-tier base layer decentralized application (DApp) network within one to three years. Aptos is the most likely candidate for leadership, according to Hayes, but Wu Blockchain did not provide further details about the selection.
Aptos uses a “modular approach” to transaction processing. Here, transactions are grouped into batches and executed using a sharded architecture.
Solana on-chain and derivatives indicators have investors worried.
In addition to direct competition from layer 1 alternatives, Solana is under increasing pressure as Ethereum’s layer 2 ecosystem TVL remains above $40 billion. Blockchains including Arbitrum, Base, and Optimism have already surpassed the Solana network in terms of DApp activity.
Note that Solana’s weekly trading volume of $589 million is significantly less than BNB Chain’s $4.9 billion and Arbitrum’s $9.5 billion activity during the same period. Likewise, Solana’s decentralized finance TVL of $1.2 billion is higher than competitors Aptos and Avalanche, but significantly lower than BNB Chain’s $4.9 billion, according to DappRadar.
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To better understand market psychology, traders are advised to observe the derivatives market. Perpetual contracts, also known as inverse swaps, contain an implied interest rate that is recalculated every eight hours. In other words, a positive ratio indicates that buyers (buyers) prefer higher leverage to be utilized.
The funding rate for SOL perpetual futures has remained below 0.01% every 8 hours for the past 7 days. This corresponds to a typical neutral market rate of 0.2% per share. The last period of moderate excitement occurred on June 6, when leveraged buyout costs spiked 0.5% per share.
Given the Solana Network’s DApp deposit activity, trading volume, and lack of demand from SOL derivatives traders, it remains highly likely that SOL price will fall below the $130 support level in the near term.
This article is written for general information purposes and should not be considered legal or investment advice. The views, thoughts and opinions expressed herein are those of the author alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.