Key takeaways:
SOL’s funding rates indicate a cautious outlook, but historical trends suggest potential short-term price increases.
Falling network activity and rising competition impact SOL, although treasury strategies and fundamentals continue to provide support.
Solana’s native token, SOL, fell to a two-week low of $213 on Tuesday, reflecting increased risk aversion in the cryptocurrency market. The initial optimism following the US interest rate cut on Wednesday quickly faded as worries about the labor market and escalating inflation re-emerged.
In just 48 hours, SOL’s price dropped by 12%, leading to $112 million in liquidations of leveraged long positions, according to CoinGlass data. This sharp correction has prompted traders to speculate whether this dip indicates a deeper downward trend or merely reflects excessive fear in a deteriorating macroeconomic climate.
The funding rate for SOL perpetual futures remained close to zero on Tuesday, indicating limited demand for leveraged long positions. Under standard market conditions, this rate usually ranges from 6% to 12%, meaning buyers are typically the ones covering costs to maintain exposure. The last period of high optimism was on Aug. 14, when the funding rate soared to 30%, reflecting significant bullish leverage.
When SOL briefly reached $253 on Thursday, the funding rate stayed neutral, suggesting traders were reluctant to bet on further upside. However, the lack of leverage demand in derivatives markets doesn’t necessarily signal outright bearish sentiment.
On Aug. 19, the SOL funding rate turned negative following a 13.5% decline over five days. Nonetheless, the $176 point turned out to be a strong entry level as SOL rebounded to $206 on Aug. 24. A similar pattern occurred earlier: the negative funding rate on Aug. 4 preceded a 19% drop over six days, which also became a buying opportunity as SOL surged 25% by Aug. 14.
SOL price decline corresponds with reduced network activity and emerging competitors
The softening enthusiasm surrounding SOL can be attributed to a drop in activity on the Solana network, as traders increasingly focus on derivatives trading on Aster. This platform, launched on BNB Chain by YZI Labs (previously Binance Labs), promotes itself as free from maximal extractable value and has received public endorsement from Binance founder Changpeng Zhao.
In the last week, active addresses on Solana declined by 28%, while network fees dropped by 15%. In contrast, Ethereum’s fees increased by 28% during the same timeframe, and BNB Chain experienced a remarkable 74% rise. New competitors like Hyperliquid have challenged Solana’s previous advantages, especially as Aster’s documentation mentions its plans to develop its own blockchain.
Nevertheless, the downside risk for SOL may be contained, as more companies are actively pursuing strategies to build substantial cryptocurrency reserves. The latest initiative came from Fitell Corp (FTEL) in Australia, which issued a $100 million convertible note aimed at launching a “Solana treasury strategy.” The intention is to generate yield by employing a mix of onchain and derivatives strategies.
Wider market conditions have also impacted sentiment. Concerns over rising inflation and a weakening US labor market were emphasized by US Federal Reserve Chair Jerome Powell on Tuesday, resulting in a 1% decrease in the tech-heavy Nasdaq index that day. Increased risk aversion has resulted in a $178 billion reduction in cryptocurrency market capitalization since Sunday.
Related: E*Trade to add Bitcoin, Ether, Solana in Morgan Stanley’s crypto expansion
There is no definitive sign that SOL traders anticipate a $200 retest based solely on the negative perpetual futures funding rates. The Solana network continues to lead in transaction volume and active addresses, while holding the second position in total value locked (TVL), according to DefiLlama metrics. These factors bolster the case for a potential price recovery as risk appetite slowly returns.
This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice. The views, thoughts, and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.
