One of the standout performers in the crypto market this year has been Solana (SOL 3.55%), which is up almost 1,000% in 2023. On the strength of its recent performance, Solana has become the fifth-most valuable cryptocurrency in the world, and some analysts are even predicting that it could soon surpass Ethereum (ETH 2.60%) in terms of market cap.
What's all the more remarkable is how Solana's performance this year compares to that of Bitcoin (BTC 1.32%), which has historically served as the benchmark for the overall crypto market. While Solana is up almost 1,000% for the year, Bitcoin is up "just" 160%. That's despite all the hoopla surrounding the possible new spot Bitcoin exchange-traded fund and the Bitcoin halving next year, which will slow the crypto's supply growth. So the obvious question becomes: Can Solana outperform Bitcoin again in 2024?
Reasons for Solana's outperformance
To answer that question, it's important to understand the key factors behind Solana's meteoric rise in 2023. In the early part of the year, investors embraced the narrative that Solana had finally distanced itself from the meltdown of the cryptocurrency exchange FTX (FTT 0.78%). The former chief executive officer of FTX, Sam Bankman-Fried, had been a major backer of Solana, and the risk of FTX contagion was seen as a real threat at the end of 2022.
As this perceived risk subsided, it was only natural that the price of Solana eventually retraced its way back from $10 to a level around $40, which is where it was trading before the FTX collapse.
CRYPTO: SOL
Key Data Points
Around this time, institutional investors, not just retail investors, began to buy into the narrative around a Solana recovery. They increasingly began to see Solana as a viable alternative to Ethereum, and that apparently led to a new influx of institutional investor money into Solana. CoinShares, which tracks institutional flows into and out of various cryptocurrencies, has documented a consistent pattern of institutional money leaving Ethereum and moving into Solana.
So far, so good, right? Both retail and institutional investors seemed to be aligned on Solana as a viable competitor to Ethereum.
Image source: Getty Images.
But over the past month, the narrative around Solana seems to have taken another, completely unexpected turn, and that's why I'm concerned that Solana might be overheating. This new, more speculative phase has corresponded with the rise of Solana meme coins. The obvious example is Bonk (BONK 1.14%), which has gone absolutely wild this year. It's now up almost 10,000% year to date.
The spectacular success of Bonk has led to the launch of even sillier meme coins, including ones that feature dogs, dragons, and, yes, melons. If this meme coin mania continues, it will only lead to more volatility for Solana, which is at risk of becoming the blockchain of choice for crypto speculators. As a result, all the hard work that has gone into making Solana a viable competitor to Ethereum could be undone by the get-rich-quick crypto crowd.
Question marks for Solana
There are also several question marks surrounding Solana in areas where it has traditionally been very strong, such as non-fungible tokens (NFTs). At the beginning of 2023, a number of popular NFT collections left Solana for other blockchains, due to the perceived risk of FTX contagion. At the same time, NFTs known as Ordinals took off on Bitcoin, to the point where NFT sales volume on Bitcoin is now higher than on Solana. Before 2023, this would have been unthinkable.
There's also the matter of regulatory risk. In June, the Securities and Exchange Commission seemed to conclude that Solana was an "unregistered security." When the SEC filed a lawsuit against cryptocurrency exchange Coinbase Global (COIN +5.70%), it specifically mentioned Solana as one of several unregistered securities trading on the Coinbase platform. This is a tricky issue to parse because the SEC did not bring any formal enforcement action against Solana. But still, this is exactly the sort of regulatory issue that could torpedo a Solana rally in 2024.
Can Solana keep it up in 2024?
Certainly, there's a lot to like about Solana. I've been banging the drum for Solana ever since the collapse of FTX. I've always viewed Solana as a viable alternative to Ethereum, and I've always thought the valuations of the two cryptos should be much narrower than they are today.
But the new speculative frenzy around Solana has me very concerned. Increasingly, it suggests that Solana's performance won't be sustainable in 2024. Solana has simply gone up too far, too fast. Yes, Solana may continue to outperform Ethereum next year. But it's looking increasingly unlikely that it will also outperform Bitcoin.
