Cryptocurrencies

Despite a brief spike to $151 on June 16, native token Solana witnessed

Despite a brief rally to $151 on June 16, Solana’s native token SOL (SOL) has seen a 24% correction since June 7. It underperformed compared to the overall cryptocurrency market capitalization, which fell 14% during the same period.

This suggests that SOL’s problems are more pronounced than the overall decline in market interest in cryptocurrencies.

Several indicators, including the Solana network’s on-chain activity and demand for leveraged positions, suggest that SOL’s bearish momentum is likely to continue. If demand remains stagnant, this could lead to a retest of $130 or lower.

The price of SOL may struggle due to the absence of exchange-traded funds (ETFs).

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.

Stock market gains were driven by technology stocks, and recent employment and consumption data point to positive results for the second quarter. Investors expect the US central bank to start cutting interest rates by two-thirds by September.

Despite the high potential of the cryptocurrency market, investors fear that the US economy will not be able to maintain its growth for much longer, given rising interest rates. This risk is particularly burdensome for altcoins like SOL, where Bitcoin (BTC) and Ether (ETH) have preferential access to institutional funds via exchange-traded funds (ETFs).

Even if the cryptocurrency market sees an uptick in the coming months, competition for smart contract-driven blockchains will be fierce. Multiple applications running on the Solana network provide asset bridges to other blockchains that also compete in terms of yield, airdrops, liquidity, and token launches.

Solana’s initial staking reward rate is only 1.3% higher than the SOL token’s inflation rate. In contrast, Ethereum offers an effective reward rate of 2.8% due to its burn mechanism, resulting in annual inflation of just 0.4%, according to StakeRewards. This has a direct impact on Solana’s total value locked (TVL), which has remained below $30 million since May.

BitMEX co-founder and former CEO Arthur Hayes predicts that Solana will not be a next-level decentralized applications (DApps) network within one to three years. According to Hayes, Aptos is the most likely candidate for leadership, although he did not provide many details on this choice, according to Wu Blockchain.

Aptos uses a “modular approach” to transaction processing, in which transactions are grouped into batches and executed using a chunked architecture.

Solana’s on-chain metrics and derivatives worry investors

In addition to direct competition from Layer 1 alternatives, Solana faces increasing pressure as the Ethereum TVL Layer 2 ecosystem remains above $40 billion. Blockchains including Arbitrum, Base and Optimism have already overtaken the Solana network in terms of dApp activity.

Top blockchains ranked by 7-day decentralized application volume, in USD. Source: DabRadar

Notice how Solana’s weekly trading volume of $589 million is significantly lower than BNB Chain’s activity of $4.9 billion and Arbitrum’s activity of $9.5 billion during of the same period. Similarly, according to DappRadar, DeFi TVL on Solana stands at $1.2 billion, which is higher than competitors Aptos and Avalanche, but much lower than BNB Chain’s $4.9 billion.

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To better understand market sentiment, traders are advised to monitor financial derivatives markets. Perpetual contracts, also called reverse swaps, include a built-in rate that is recalculated every eight hours. In short, a positive rate indicates a buyer preference for using higher leverage.

8-Hour SOL Perpetual Funding Futures Contracts. Source: Laevitas.ch

The SOL perpetual futures funding rate has remained below 0.01% every 8 hours over the past 7 days, which equates to a rate of 0.2% per week, which is typical for neutral markets . The last period of subdued enthusiasm occurred on June 6, when the cost of leveraged trades jumped to 0.5% per week.

Considering the Solana network activity via dApp deposits, volumes, and lack of appetite from SOL derivatives traders, the chances of SOL price falling below the $130 support level in the near term remain high.

This article is intended for general information purposes and is not intended and should not be relied upon as 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.

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