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Here are my brief thoughts on Solana, mainly discussing the reasons why I believe Solana may underperform other assets in December (I believe this trend has already begun, but will continue).
I opened a short position at around $235-240, and believe this is the last great asymmetric opportunity of the year. However, I should note that I also hold short positions in other assets (such as Bitcoin, as the gap between Saylor's buy-in price and the ETF continues to widen; and I also believe that if Ethereum declines, its downward trend may last longer).
In summary, Solana's performance this year has not truly been tested, and its main drivers are being depleted (or in the process of being depleted).
Why will SOL perform poorly?
In my view, the real factors that have driven Solana's performance this year to become the best-performing large-scale asset YTD include the following:
1. A more active and diversified ecosystem than competitors, with fast transaction speeds;
2. The strongest "casino" environment, attracting many meme participants willing to use SOL as the unit of account;
3. Mid-year capital inflows - I believe many fund managers and large liquidity participants were squeezed out due to the lack of ETH ETF hype, and experienced a certain degree of "existential crisis" in their future asset allocation.
Today, I believe these three driving forces have all weakened, and are highly vulnerable to shocks, with a large amount of excess bubble still needing to be deflated. Here are my specific reasons:
As a leading L1 focused on speed and diversity, Solana is facing strong threats from HYPE and ETH/Base
The rise of these threats has been unexpected and has not been effectively addressed.
The chart below shows Artemis traffic data, which you can choose to observe on a 1-week or 1-month time frame. This is the most significant capital flow from Solana to EVM so far this year, and this shift is not only reflected in traffic. We can also observe it in the case of popular domains, such as the meme coin sector in the AI field - previously considered top projects like GOAT, FARTCOIN, ZEREBRO and AI16Z have halved in valuation during this period, while VIRTUAL and proxy ecosystems have thrived in the same period.
Furthermore, I believe Solana has not faced real competition in the L1 space for a long time. Although HYPE is still in its early stages, its pursuit of democratized ownership and the attractiveness of the team's strength cannot be ignored in the short term.
Solana has not yet experienced a true supply shock event in 2024
In comparison, other major assets have already undergone severe tests, such as Bitcoin's MTGOX incident and German regulatory issues, as well as Ethereum's ETF launch. Solana has been almost unaffected in this regard, with only a brief fluctuation during the Jump sell-off this summer, which was quickly overlooked as the larger correction in ETH subsequently diverted attention.
Solana's best performing period in the past few months has been as a high-beta asset to Bitcoin, taking a large portion of capital flow from Ethereum (a trend that has gradually dissipated), while attracting attention far beyond the lackluster and unattractive small Altcoins.
In the liquid fund space, the only two options for GPs to realize cash distributions in FY2024 should be:
1. Percentage distribution of realized gains;
2. Percentage distribution of unrealized gains, but with a high-water mark adjustment.
In either case, given Solana's outstanding performance last year, I believe fund managers will be inclined to sell SOL, possibly for the following reasons:
a) As the best performing asset of the year, it has already achieved significant gains;
b) Believe that the lagging parts of the portfolio still have untapped upside potential, and are more worth capturing by holding and observing the recent trend strength of other Altcoins in the H1/H4/1 time frames.
Furthermore, this trend is also driven by the hype of the Galaxy auction (with a SOL cost basis of $80-100). Fund managers participating in the auction can profit in the following way:
For example, by selling a third of the locked supply purchased at the historical high, and then "reclaiming" these tokens in the first unlock event next March, thereby realizing the spread in nominal value.
The exit liquidity of the SOL ETF is weakened by the rise of legacy tokens and the potential impact of the XRP ETF
The performance of XRP is driven by two main factors:
a) It is considered the asset most likely to launch an ETF product after ETH, with close ties to Bitwise;
b) Rumors of a 0% capital gains tax on cryptocurrency in the US.
Given XRP's pedigree (as one of the earliest cryptocurrencies) and the resignation of SEC Chairman Gary Gensler, even if the chances of an XRP ETF launch are on par with or slightly lower than SOL, it is undeniable that it is diverting market share that would otherwise have been entirely Solana's.
Complacency
Although this sentiment is difficult to quantify precisely, I intuitively believe that Solana's arrogance has reached a bottleneck, in contrast to the situation a few years ago - when ETH's dominant position was like an impregnable moat that allowed SOL to catch up.
Here are some typical examples:
1. "Network expansion vs L2"; DRIFT vs HL, displaying an "infallible" attitude;
2. Many claim that "no one will want to bridge from Solana to Base", despite obvious counterexamples;
3. Some former staunch ETH supporters completely capitulated just weeks before ETH rallied 35%, and even suddenly predicted that the ETHSOL target price would drop to extremely low levels (e.g. 0.027 ETHSOL).
Conclusion
Within the next 30 days, I believe the appeal of Solana to the marginal buyer is at its weakest so far this year (ETF liquidity is clearly inferior to ETH; the attention on Altcoins is more dispersed than before), while the motivation of the marginal seller is at its strongest (profit-taking; users who have made huge gains through memes or holding SOL choosing to sell to cash out and preserve value).
Furthermore, as the bulls try to push the price up, financing costs remain high, and this rally is entirely driven by leverage, as reflected in the recent (but temporary) breach of historical highs.
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