3 Reasons Solana Is Plummeting: Should You Buy Now?

Solana's lost 45% since its November high, but this may not be the bottom.

Solana (SOL) was one of the top-performing cryptocurrencies of 2021. It started the year in 120th position in terms of market cap and finished in 5th, overtaking heavy hitters like Cardano (ADA) and Polkadot (DOT).

Solana is a smart contract cryptocurrency that some believe could rival Ethereum (ETH). It is extremely fast and transaction costs are a fraction of those on the world's second biggest blockchain.

However, 2022 is not off to a great start so far. Solana is down almost 17% since the start of the year and about 45% since its November highs. Let's take a look at the reasons for the drop and what it might mean for investors.

1. The whole crypto market is crashing

The total money invested in cryptocurrency has fallen by over 30% since mid-November, and many big cryptocurrencies have lost value. Wider economic factors have played a big part. After many months of fiscal and monetary stimulus, the Federal Reserve announced it will start to tighten its stance.

In addition to other measures, it looks like the Fed could now increase interest rates in March, which was earlier than people expected. This, combined with the omicron variant, sent the crypto market into a tailspin as people pulled out of riskier asset classes.

2. Solana's had some technical issues

Solana's rapid growth has not been trouble-free. The ecosystem, which now hosts over 1,000 projects, has had several outages in the past six months. The most serious was in September when the network went down for 17 hours. Some see these as relatively normal growing pains, but others are concerned it's a sign the network has put too much emphasis on speed and not enough on security. One worry for investors is that Solana is simply not as road tested as more established smart contract cryptocurrencies. Technical difficulties add to that unease.

3. Solana may have been due for a correction

One of the challenges of crypto investing is that speculation is commonplace. People buy cryptos they don't fully understand because they see the price is going up and hope to catch the wave. This means prices often get driven to unsustainable levels.

A related issue is that -- unlike buying stocks -- it isn't as easy to evaluate an asset based on its fundamentals. You can't use a crypto's earnings or cash flow to estimate what it might be worth because crypto projects don't need to publish any financial information. There are metrics crypto investors can use, but it is very different from the relatively solid ground of stock investing.

There's also a hope that blockchain could transform the way we live, and the whole industry could eventually be worth $100 trillion -- 50 times its current value -- or more. This hype means people feel pressured to get in early, and also makes it difficult to see whether a crypto is overpriced.

In Solana's case, for months it seemed as if the sky was the limit. Its price began to rally in July and continued to trend upward until about November. For every critic that warned Solana was getting too hot, another would suggest Solana had the potential to equal if not overtake Ethereum. Ultimately, after an 11,000% growth in 2021, it isn't surprising that Solana's sun sank a little.

Should you buy?

In some circumstances, adding to your portfolio when prices drop can be a sound investment strategy. But there are some caveats. Firstly, we don't know what will happen to the crypto industry in the coming months -- there's no guarantee this is the bottom. Part of the reason crypto prices soared last year was there was so much money available. As that changes and the Fed becomes more hawkish, the crypto market may suffer. In addition, we don't know what impact increased regulation will have.

Secondly, it doesn't make sense to rush into a purchase just because the price is lower than it was three months ago. If you weren't already planning to buy Solana, don't do so now simply because it's cheaper. Take the time to do your research. Make sure you understand Solana, how you think it might perform in the coming five to 10 years, and how it stacks up against its competitors. Decide whether you think Solana might be a good long-term investment.

All in all, it may be a good time to buy Solana, but only if the following are true:

• You believe it could be a good long-term opportunity.
• You're on top of your other financial goals, such as retirement and your emergency fund.
• You're investing money you can afford to lose.
• You understand Solana's price could drop further.
• You know that crypto can be volatile and understand the risks involved.

Cryptocurrency investing can produce incredible returns, but it is also an extremely risky industry. If you want to buy Solana, use a reputable cryptocurrency exchange and make sure it only represents a small portion of your overall portfolio.

RELATED: Best Places To Buy Solana