In late December, Solana (SOL -5.25%) broke through the $100 mark for the first time in 18 months. At that point, the cryptocurrency was up nearly 10-fold for the year and seemingly out of nowhere had become one of the best-performing cryptocurrencies in the world.
But the new year has been a completely different story. While Solana is still up a staggering 500% during the past 12 months, it's gone nowhere since the start of 2024 and at one point was down as much as 20%. Is this just a case of profit-taking by investors who won big on Solana in 2023, or has something fundamentally changed?
The case for Solana
On the positive side, Solana's underlying blockchain fundamentals continue to show signs of improvement. The key here is to focus on "on-chain" activity, which tells you what's actually happening on the blockchain itself. The more activity, the better.
In this regard, Solana hasn't disappointed. Whether it's non-fungible token (NFT) sales volume or decentralized exchange trading volume, activity seems to be picking up across the board.
That's showing up in key metrics such as total value locked (TVL), which is a quick way to gauge the overall health of a blockchain. In 2023, TVL for Solana skyrocketed, and that led to a surge in positive investor sentiment. By the end of 2023, it wasn't just retail investors piling into Solana, but also institutional investors who liked what they saw. It was very easy to support the overall narrative of Solana being a faster, more cost-efficient blockchain than Ethereum (ETH -0.37%) with these improving metrics.
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Currently, the ultimate bull case scenario calls for Solana to increase nearly 50-fold in value over the next 12 months. That's if you buy into the narrative that Solana really is an Ethereum killer and is capable of displacing Ethereum as the preeminent Layer 1 blockchain network. According to this narrative, there will be a huge migration of users and developers away from Ethereum and into Solana, triggering a gigantic surge of value creation.
The case against Solana
The problem, quite frankly, is that all of those improving numbers and metrics might be somewhat of a mirage. At the end of the year, there was a tremendous amount of speculation around meme coins trading on the Solana blockchain. Did all of that increase trading volume on Solana's decentralized exchanges? It was probably just the result of people moving in and out of a bunch of dog-themed meme coins like Bonk.
If there is a meme coin collapse, as now seems to be happening, these numbers could easily reverse. Just to give you an idea of how frenetic the trading in Solana meme coins was at the end of last year, people were going to great lengths to buy Solana's $599 Saga smartphone as part of an elaborate arbitrage opportunity.
If you bought the Saga phone, you received 30 million free Bonk meme coins. At some point, the value of the meme coins became vastly greater than the value of the phone itself. By the end of December, people were willing to pay more than $5,000 for a new phone on eBay, just to get access to those meme coins.
What's even more concerning is that there are now a lot of questions being raised about potential security flaws in that Solana phone. Crypto analysts were sounding the alarm, and the security issue quickly became so hot that the co-founder of Solana had to make public statements about the overall security of the Solana blockchain ecosystem. That's not the way you want to begin a new year.
Is Solana overheating?
Over the long term, I remain bullish on Solana's prospects. That's due, in large part, to the possibility that Solana one day displaces Ethereum as the top Layer 1 blockchain network. If you look at Ethereum's current market cap ($275 billion) and compare it to Solana's current market cap ($43 billion), it's easy to see just how much value Solana might be able to unlock in the coming years.
However, over the short term, I'm increasingly concerned that Solana has overheated. It's gone up too far, too fast, and that's resulted in a lot of speculators and momentum traders getting in on the action, all hoping to make a quick buck. Instead of feeding the frenzy around meme coins and smartphone arbitrage opportunities, Solana needs to get back to basics and build lasting value in the blockchain world.
