Solana (SOL +1.66%) was one of the hottest cryptos of 2021, rising from relative obscurity at the beginning of the year to establishing itself as a blue chip cryptocurrency as it climbed from near $1.50 at the start of the year to over $200 by November of 2021.
In 2022, much of the enthusiasm wore off, and Solana fell more than 90% for the year, shedding tens of billions of dollars in market cap in the process.
But a funny thing happened as the year ended and the calendar flipped to 2023. Rather than fading away into further obscurity, Solana began the year with a furious and unexpected rally.
So far, Solana is up more than 60% year to date just over a week into the year. What's driving the rally, and can the crypto continue to perform well over the course of the year?
Image source: Getty Images
Bad vibes
Before jumping into Solana's big rally, let's take a quick look at what drove it lower at the end of 2022. It was plagued by the same issues as the crypto market as a whole, but its problems escalated in November as the FTX scandal unfolded.
Sam Bankman-Fried, FTX, and Alameda Research (the trading firm founded by Bankman-Fried) were heavy investors in Solana as well as many of the tokens within the Solana ecosystem like Serum (SRM 0.17%). Because of that, Solana and these tokens took a gut punch when FTX filed for bankruptcy.
The ensuing turmoil sparked fears that FTX and Alameda would sell off massive amounts of Solana as a result of the bankruptcy, which would be another overhang for the now-embattled token.
CRYPTO: SOL
Key Data Points
The Bonk factor
Part of Solana's explosive start to 2023 is simply a relief rally, but a large part of it is widespread enthusiasm for a new meme coin within the Solana ecosystem modeled after Shiba Inu called Bonk.
I know what you are thinking: Didn't investors have enough with these types of dog-themed meme coins last year? While it is right to be skeptical, and the long-term value of Bonk is indeed questionable, it's important to note that at the very least, the meme coin has restored a sense of fun and enthusiasm to Solana (and the broader space as a whole) at a time when it really needed it.
Part of the total supply of 99 trillion Bonk coins was air-dropped into the wallets of Solana developers, non-fungible token (NFT) artists, NFT collectors, and others within the Solana community. And it caused a stir on social media, with both Bonk and Solana at one point trending on Twitter.
The people behind Bonk said that its goal was to bring fun and fairness back to the Solana community with a meme coin "where everyone gets a fair shot" because they were tired of the "toxic Alameda tokenomics" that came to dominate the space during Alameda's time.
They were likely referring to Alameda-linked tokens and projects like Serum, Bonfida, and MAPS. (These types of low-float tokens were often given to venture capital firms like Alameda that could manipulate the price and then dump them on retail investors at inflated prices.)
Judging from the reaction so far, it's mission accomplished for Bonk. Transactions went from essentially zero to over 88,000 an hour by Jan. 3, leading to a surge of activity on Solana.
While it remains to be seen what eventually becomes of Solana's own Shiba Inu-themed meme coin, it gave a much-needed jolt of life to Solana at a time when it was struggling. If nothing else, it has helped Solana move beyond the overwhelmingly negative sentiment of the Sam Bankman-Fried era. And this renewed attention might remind investors of many of Solana's positive attributes.
Beyond Bonk
Let's remember: Solana has plenty going for it despite the recent negativity. It wasn't long ago that Bank of America called Solana the Visa of the crypto space, thanks to its massive throughput and lightning-fast transaction times. Furthermore, fees for transacting with the Solana network are very cheap, making it user friendly.
Solana is also in a league of its own among cryptos when it comes to hardware: No other cryptocurrency team is developing a crypto-native smartphone and operating system. If Solana developers are successful with the implementation of their phone (called Saga) and operating system, they could create a rival to Apple's (AAPL +1.08%) operating system and a boon to the creator economy.
Creators have long decried the 30% take rate that Apple charges for their apps in the App Store, and Solana's solution could offer them a viable alternative to the App Store. We are a long way from Saga truly taking on the iPhone, but Solana has made tangible progress so far, and there's something to be said for this level of ambition.
Furthermore, while some top NFT projects like DeGods and y00ts understandably left for other blockchains after the FTX fallout, Solana NFTs in general kept chugging along, and December was actually a record month for volume for its top NFT marketplace, Magic Eden.
Can the rally last?
If nothing else, Bonk has restored a feeling of enthusiasm and excitement to Solana and helped its community to close the book on the bad feelings at the end of 2022. This renewed investor interest and surge of activity is likely to remind investors about many of the positive attributes of Solana, and draw the interest of new investors and users.
While it would be unreasonable to expect the rally to keep up this pace all year, it seems almost inevitable that Solana will have a better 2023 than 2022, and that it should finish the year with a positive return. I continue to hold it and still think that it is worthy of an allocation in the portfolio of risk-tolerant crypto investors.
