Here are some of my brief thoughts on Solana, focusing on why I think Solana may underperform relative to other assets in December (a trend I believe has already begun, but will continue).
I opened a short position at ~$235-240, thinking this was the last great asymmetric opportunity of the year. I should note that I also have short positions in other assets (e.g. Bitcoin, as the gap between Saylor's buy price and the ETF continues to widen; and I think Ethereum's downtrend could extend longer if it falls).
In summary, much of Solana’s performance this year remains untested, and its main drivers are running out of steam (or in the process of running out of steam).
Why will SOL perform poorly?
In my opinion, the real factors driving Solana’s performance this year to be the best YTD performer among scaled assets include the following:
1. A more active and diverse ecosystem than competitors, with fast transaction speeds;
2. The most powerful "casino" environment has attracted many meme participants who are willing to use SOL as the unit of account;
3. Mid-year inflows - I think many fund managers and large liquidity players were squeezed out by the lack of enthusiasm for the ETH ETF and experienced some degree of "existential crisis" in terms of future asset allocation.
Today, I believe that all three of these drivers have weakened and are extremely vulnerable, with a lot of excess froth still to be trimmed. Here are my specific reasons:
As the leading L1 with speed and diversity as its main focus, Solana is facing strong threats from HYPE and ETH/Base
The rise of these threats was unexpected and has yet to be effectively addressed.
The image below shows Artemis traffic data, and you can choose to observe it on a 1-week or 1-month time frame. This is the most significant shift in Solana funding flows to EVMs so far this year, and the shift isn’t just reflected in flows. We can also observe from cases in popular fields, such as the meme currency sector in the AI field - GOAT, FARTCOIN, ZEREBRO and AI16Z, which were previously considered top projects, all saw their valuations shrink by half during this period, while VIRTUAL and proxy The ecosystem has thrived during the same period.
In addition, I think Solana has not encountered a real competitor in the L1 field for a long time. Although HYPE is still in its early stages, its pursuit of democratized ownership and the strength of the team show that it cannot be ignored in the short term.
Solana has not yet experienced a true supply shock event in 2024
In contrast, other major assets have weathered severe tests, such as Bitcoin’s MTGOX incident and German regulatory issues, and Ethereum’s ETF launch. Solana has been largely unscathed in this regard, with only a brief bout of volatility during the Jump sell-off this summer, which was quickly ignored as the subsequent larger pullback in ETH distracted attention.
Solana’s best performing period over the past few months has been as a high-beta asset to Bitcoin, taking the majority of flows away from Ethereum (a trend that has since dissipated) while attracting far more attention than a lackluster, unattractive group of small-cap altcoins.
In the liquid fund space, GPs should have only two options for cash distributions in fiscal 2024:
1. Distribution based on percentage of realized gains;
2. Distribution based on the percentage of unrealized gains, subject to a recourse adjustment based on the previous year’s high water mark.
In either case, given Solana’s outperformance last year, I think liquid fund managers would be inclined to sell SOL for a number of reasons:
a) As the best performing asset of the year, it has achieved a significant increase;
b) Believe that there is still untapped upside potential in the previously underperforming portion of the portfolio and that it is more worthy of capturing gains by holding and watching other altcoins that have recently shown trend strength on the H1/H4/1 timeframes.
In addition, this trend is also driven by the popularity of Galaxy auctions (SOL cost basis is $80-100). Fund managers participating in the auction can profit in the following ways:
For example, selling a third of the locked supply purchased near all-time highs and subsequently “reclaiming” those tokens in the first unlock event in March of next year, thereby capturing the difference in notional value.
SOL ETF’s exit liquidity weakens due to the rise of established tokens and the potential impact of XRP ETF
XRP’s performance is driven by two main factors:
a) It is considered to be the asset most likely to launch an ETF product after ETH, and is closely related to Bitwise;
b) Rumors that US cryptocurrency capital gains tax will drop to 0%.
Considering XRP’s credentials (as one of the earliest crypto assets) and the resignation of SEC Chairman Gary Gensler, even if the odds of an XRP ETF being launched are equal to or slightly lower than those of SOL, it is undeniable that it is diverting market share that originally belonged entirely to SOL.
Complacency
While this sentiment is hard to quantify precisely, intuitively I think Solana’s hubris has reached a plateau, in contrast to the opposite situation a few years ago when ETH allowed SOL to catch up due to its superior position, which acted like an impenetrable moat.
Here are some typical examples
1. "Network extension vs L2"; DRIFT vs HL, showing a "no mistakes" attitude;
2. Many people claim that “no one will want to bridge from Solana to Base” despite clear counterexamples;
3. Some users who once firmly supported ETH completely capitulated a few weeks before ETH rose 35%, and these people even suddenly strongly predicted that the target price of ETHSOL would drop to extremely low levels (such as 0.027 ETHSOL).
Summarize
Over the next 30 days, I believe that marginal buyers’ appeal to Solana is at its weakest state so far this year (ETF liquidity is significantly insufficient compared to ETH; attention on altcoins is more fragmented than before), while marginal sellers’ motivation to sell is at its strongest state at the same time (profit taking; users who have made huge gains through memes or holding SOL choose to sell to cash out).
Furthermore, funding costs continue to remain elevated as bulls attempt to drive prices higher, a move that has been driven entirely by leverage and reflected in the recent (but short-lived) breakout to all-time highs.
