Solana Plummets in Latest Crypto Crash, Should You Buy?

The popular smart contract crypto is down 80% from its high, but that doesn't necessarily make it a bargain.

Solana (SOL) has fallen more than any other top 10 crypto today. While Bitcoin (BTC) is down around 8% and Ethereum is down 10%, Solana has plummeted by over 30%, according to CoinMarketCap data.

Solana was one of last year's crypto darlings, with an increase of over 11,000% across the year. A wider crash in crypto prices and a series of outages on the Solana network mean the once stellar crypto has lost some of its shine. It's now down around 80% from its all-time high.

What's causing Solana to plummet?

There are several factors pushing Solana's price down. First and foremost, today's disappointing monthly inflation figures impacted the whole crypto market. Inflation was down slightly from last month, but not as much as economists had hoped.

The Fed already hiked interest rates by 0.50% last week in an attempt to curb inflation. Federal Reserve Chair Jerome Powell warned that more rate hikes could be necessary. Rate hikes and other economic tightening measures cause investors to pull back from riskier assets such as crypto. In addition, fears are growing that the Fed won't be able to tackle inflation without triggering a recession.

It isn't clear why Solana suffered more than other coins, but there's a good chance the jitters of the collapse of Terra's LUNA had an outsized impact on Solana. Solana's recent outages may make investors view it with even more caution, especially as it is clear that being a top cryptocurrency by market cap is no guarantee against disaster. As investors digest the possibility of a crypto winter, they may wonder whether Solana can sustain itself.

Should you buy?

The decision to buy cryptocurrency depends on your personal financial situation and your long-term views on how that crypto might perform. Let's break both down in a little more detail.

Your financial situation and investment strategy

Before you buy a high-risk asset like crypto, it's good to be on top of your other financial bases. For example, prioritize building an emergency fund over making any crypto purchases. If you can put together enough emergency savings to cover three to six months’ worth of living expenses, you'll be cushioned against unexpected financial crises.

Similarly, make sure you're in good shape with your retirement savings. Nobody wants to be struggling in their old age because crypto prices crashed and never came back again. If you're in good shape financially and have money to spare, the next step is to consider how buying Solana may fit with your wider investment strategy.

Ideally, crypto should only make up a small percentage of a diversified portfolio. And, as with any investment, you need a plan on what you're going to buy and how long you're going to hold it. Otherwise it's easy to get caught up in the latest hype and make emotional decisions about what to buy or sell. Finally, crypto investors need to have a high tolerance for risk. If dramatic price drops are going to cause you sleepless nights, don't buy Solana.

Solana's long-term prospects

Solana rose to fame last year as many considered it a strong alternative to Ethereum (ETH). Ethereum struggles with network congestion and high fees, and Solana's super fast transaction speed and low fees appealed to investors and developers alike.

However, Solana is not the only Ethereum alternative on the market. There are a number of different smart contract cryptos, and it's important to see how Solana stacks up against all of them. Solana's recent technical troubles may be temporary, but they may also be a warning sign that the blockchain can't handle the high demands on its network.

Try to consider how you think the whole crypto market will perform in the coming 10 to 20 years. We may see newer cryptos that overtake Solana just as it surpassed several older programmable cryptos last year. We may see investors move away from crypto altogether -- either because regulation stifles innovation and growth or because, say, quantum computing undermines blockchain security. There are a lot of unknowns, but if you're aware of them you can make better decisions.

Hope for the best and prepare for the worst

People might buy Solana in the hope that it could eventually generate high returns. But you also need to be prepared for it to fall to zero. This is why it's important to only invest money you can afford to lose in Solana or any other cryptocurrency. The ideal scenario is that you're well positioned to benefit from any gains without being thrown off base by any further crypto crashes.