Are We Seeing a Solid Recovery for Solana (SOL) as Crypto Markets Bounce Back?

Solana's (SOL) price has struggled to regain the $140 mark, despite some recovery in the overall cryptocurrency market. Analysts point to decreased leverage demand and low network fees as factors hindering short-term growth. Understanding the implications of market trends and external economic factors can provide insights into SOL's potential movements.

Key Takeaways

Solana's network activity growth hasn't fully counteracted the decline in leverage demand and weak network fees, limiting short-term bullish prospects for SOL.
A significant price recovery to $160 hinges on stronger support in the derivatives market and heightened confidence among investors amid ongoing macroeconomic uncertainties.

Solana's native token, SOL, was unable to reclaim the $140 threshold on Monday, even while it made some progress in recovering from previous losses. Ongoing concerns, such as a negative funding rate in SOL perpetual futures and decreased on-chain activity on the Solana network, are negatively impacting investor sentiment. Over the past 30 days, SOL has seen a 30% decline, significantly underperforming compared to the wider altcoin market. Currently, traders are evaluating the potential for a sustainable bullish trend.

SOL/USD vs. altcoin market capitalization. Source: TradingView / Cointelegraph

Investor anxiety across the crypto market is fueled by waning confidence in the U.S. economy, compounded by signs of weaknesses in the labor market and a growing shift towards artificial intelligence investment. According to the CEO of Deutsche Bank's DWS asset management division, there is “no playbook” for valuing the AI sector, which requires more evidence beyond efficiency improvements to justify elevated valuations.

In the wake of a historic 43-day government shutdown in the U.S., several major consumer brands—like Target, Home Depot, and McDonald’s—have lowered sales expectations due to weaker-than-expected earnings.

Moreover, the cancellation of the U.S. October Consumer Price Index (CPI) and unemployment data release has left traders with limited visibility into the Federal Reserve's upcoming monetary policy decision set for December 10.

SOL rebounds alongside wider crypto market bounce: Is $160 possible?

Factors Impacting SOL's Price: Derivatives Stress and Declining Activity

The challenges facing SOL reflect a broader reduction in risk appetite among traders, but additional issues specifically related to Solana have likely played a role in its lagging performance compared to major altcoins. The successful rollout of XRP exchange-traded funds (ETFs) in the U.S. has intensified competition for institutional investments, with anticipated launches for other cryptocurrencies like Litecoin and Chainlink on the horizon.

SOL perpetual futures annualized funding rate. Source: laevitas.ch

Since last Friday, demand for bearish leverage on SOL perpetual futures has remained consistent, leading to a negative funding rate. This scenario indicates that traders are effectively paying to hold positions that profit from further price declines. Typically, this indicator would range from 6% to 12% under normal conditions, to offset opportunity costs. Additionally, SOL's overall futures open interest has fallen by 27% over the past month, suggesting a waning demand for leverage positions.

SOL 2-month futures annualized basis rate. Source: laevitas.ch

The premium on SOL's monthly futures as compared to spot prices has dropped to zero, which is a clear indication of highly bearish market sentiment. In more balanced conditions, this metric usually falls between 5% and 10%. Negative readings signal a considerable lack of demand for bullish market exposure. Expectations for bearish sentiment are likely to persist until we see a significant improvement in conditions within SOL's derivatives markets.

Solana network TVL (left) vs. weekly chain revenue (right), USD. Source: DefiLlama

Currently, the total value locked (TVL) in the Solana network has decreased to $10.5 billion, a drop of 20% over the last month. Moreover, the blockchain's revenue, indicated by weekly fees, has reached its lowest point since May, contributing to SOL's lackluster performance compared to the broader altcoin market. In contrast, Ethereum's weekly fees have only declined by 5% during the same time frame.

Blockchains ranked by 30-day active addresses. Source: Nansen

Despite these challenges, Solana maintains a strong position in terms of active addresses and transaction counts, significantly surpassing the second-place BNB Chain. Notably, Nansen's data indicates a 13% increase in activity on Solana, while Ethereum saw a 15% decline during the same period. Although these statistics may bolster investor confidence in SOL, they do not guarantee a sustained bullish trend.

Though SOL has rebounded by 14% since hitting a low of $121.50 last Friday, this recovery does not assure ongoing upward momentum, especially given the fragile state of derivatives markets and persistently low network fees. However, a short squeeze towards the $160 mark remains a possibility, contingent on a stronger expression of confidence from SOL traders.