Decoding the reasons why SOL prices dropped nearly 10% this week

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Solana’s native token, SOL, fell 25.8% in just 11 days after reaching $126.30 on December 25, 2023. Some analysts may believe that the rally is continuing as the current price of $94.4 represents a 48% increase from last month. However, cryptocurrency traders tend to quickly change their portfolios when better opportunities arise. Investors are now questioning whether Solana’s online activity confirms the deteriorating sentiment on the SOL price.

SOL price chart. Source: TradingView

Some analysts attribute SOL’s recovery to the airdrop craze that swept the network after the newly launched JITO token was listed on major centralized exchanges on December 7, 2023, within the first few hours of trading. A market capitalization of over $300 million. This was closely followed by memecoin BONK on December 14, 2023, which resulted in Solana’s Saga mobile phones being sold out due to multiple airdrops targeting mobile phone users.

However, the upward momentum is supported by a significant increase in the number of Solana’s decentralized applications (DApps) ecosystem. This comes despite the fact that many competing blockchains (including Arbitrum, zkSync, and BNB Chain) experienced outages due to increased activity in December 2023.

After the initial rush for the Solana SPL token faded, causing Jito (JTO), DogWifHat (WIF) and BONK to lose 40%, 41% and 44% respectively, investors were left with questions. Are there other factors supporting Solana’s $41 billion valuation, making it the fourth largest cryptocurrency excluding stablecoins?

When examining Solana’s total value locked (TVL), it’s clear that demand is declining, although this is not yet a cause for concern.

The TVL of the Solana network is calculated by SOL. Source: DefiLlama

Solana’s TVL (measured in SOL) peaked at 15.4 million SOL on December 19, 2023, but fell 17% to 12.8 million SOL on January 5, 2024.

On a positive note, the current TVL is 13% higher than last month. In comparison, BNB Chain’s TVL (calculated in BNB) fell by 12% during the same period, while the Avalanche Network (calculated in AVAX) fell by 8%.

To better assess the impact of the 9.7% weekly drop in SOL on Solana network demand, let’s analyze activity in terms of DApp count and active addresses.

7-day DApp quantity ranking, USD. Source: DappRadar

Notably, Solana’s performance declined over the seven days ending January 5, 2024, focusing on active volume and addresses. Additionally, Solana’s market share in terms of transaction volume is 2.6%, which does not make it a direct competitor to more established blockchains such as Ethereum or BNB Chain.

Additionally, the reduced demand for Solana DApps spans all sectors, including DeFi, liquidity staking, gaming, social networks, and NFTs. For example, leading DEX Jupiter’s weekly trading volume fell by 26%, while NFT market Magic Eden saw a 24% drop in active addresses.

Having covered the three most relevant network usage indicators, traders should now analyze whether retail investors using leverage have been affected by recent price movements. Perpetual contracts, also known as inverse swaps, include a fixed interest rate that is typically recalculated every eight hours. Positive funding rates indicate increased leverage requirements for long positions.

The funding rate of the SOL perpetual contract is 8 hours.Source: Lavitas

The latest data shows that the funding rate is below 0.02% every 8 hours, or below 0.3% every week, which is negligible for most traders. This contrasts with the 1.7% weekly fees charged to leveraged longs (buyers) on January 2, indicating that excess demand no longer exists. It is worth noting that when SOL fell below $100 on January 5, the funding rate was still positive, erasing the gains of the previous two weeks.

Investor interest in SOL appears to have leveled off, given weak DApp activity in Solana and waning interest in leveraged purchases. Perhaps a new wave of airdrops will hit the market and attract more interest, but the recent 9% correction seems consistent with reduced demand for the Solana network.