Why do I want to short SOL?
This article analyzes the recent performance of Solana in depth, exploring its potential challenges from multiple perspectives such as supply events, competitive pressures, and complacency, and predicting the future market trends. The author reveals Solana's potential hidden concerns in terms of fund flows, ecological competition, and investor behavior through data and market phenomena, while also pointing out the changing trend of marginal buying and selling power in the market.
The following is the original content:
Here are my brief thoughts on Solana, mainly discussing the reasons why I think Solana may weaken compared to other assets in December (I believe this trend has already begun, but will continue).
I opened a short position at ~$235-240 and believe this is the last great asymmetric opportunity of the year.
In summary, Solana's performance this year has not yet truly been put to the test, and its main driving force is running out (or in the process of running out).
Why will SOL perform poorly?
In my opinion, the real factors that have propelled Solana to become the best-performing asset YTD in terms of scale include the following points:
1. An ecosystem that is more active and diversified than its competitors, with fast transaction speeds;
2. The most powerful 'casino' environment has attracted many meme participants willing to use SOL as the pricing unit;
3. Mid-year capital inflows - I believe that many fund managers and large liquidity participants have been squeezed out due to the lack of enthusiasm for ETH ETF, and have experienced some kind of 'existence crisis' in future asset allocation.
Today, I believe that the above three driving forces have all weakened and are highly vulnerable to shocks, with a large amount of excess foam still needing to be reduced. Here are my specific reasons:
As a leading L1 with a focus 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 yet.
The following figure shows the traffic data of Artemis, and you can choose to observe it for a period of 1 week or 1 month. This is the most significant transfer of Solana's capital flow to EVM so far this year, which is not only reflected in traffic. We can also observe from popular field cases, such as the meme coin sector in the AI field - GOAT, FARTCOIN, ZEREBRO and AI16Z, which were previously considered top projects, all saw their valuations halved during this period, while the VIRTUAL and proxy ecosystems flourished during the same period.
In addition, I believe Solana has not encountered a real competitor in the L1 field for a long time. Although the HYPE is still in its early stages, the pursuit of democratizing ownership and the attractiveness demonstrated by the team's strength cannot be ignored in the short term.
Solana has not yet experienced a real supply shock event in 2024.
In contrast, other major assets have been severely tested, such as Bitcoin's MTGOX incident and German regulatory issues, as well as the launch of an ETF for Ethereum. Solana, on the other hand, has hardly been affected, with only a brief fluctuation during the Jump sell-off this summer, which was quickly overlooked as the subsequent larger pullback of ETH diverted attention.
Solana has been performing best in the past few months as a high-beta asset to Bitcoin, capturing most of the capital flows from the Ethereum network (a trend that has gradually dissipated), while attracting much more attention than smaller, unattractive altcoins.
In the field of liquidity funds, there should only be two ways for GPs to achieve cash distribution within the 2024 fiscal year:
1. Allocate based on the percentage of realized earnings;
2. Allocate by the percentage of unrealized gains, but with a clawback adjustment based on the high watermark from the previous year.
In any case, given Solana's outstanding performance last year, I believe that the fund managers would tend to sell SOL, possibly due to reasons such as:
a) As the best-performing asset of the year, it has achieved a significant increase;
b) It is believed that there is still untapped upward potential in the previously underperforming part of the investment portfolio, and it is more worthwhile to capture returns by holding and observing other altcoins that have shown trend strength in the H1/H4/1 time frame recently.
In addition, this trend is also driven by the popularity of Galaxy auctions (SOL cost benchmark at $80-100). Fund managers participating in the auction can profit in the following ways:
For example, sell one-third of the locked supply purchased near historical highs, and then 'take back' these tokens in the first unlocking event in March next year to gain a price difference in nominal value.
The exit liquidity of SOL ETF weakened due to the rise of old-school tokens and the potential impact of XRP ETF.
The performance of XRP is driven by two main factors:
a) It is considered the most likely asset to launch ETF products after ETH, closely linked to Bitwise;
b) There are rumors about the US cryptocurrency capital gains tax being reduced to 0%.
Considering the qualifications of XRP (as one of the earliest encryption assets) and the resignation of SEC Chairman Gary Gensler, it is undeniable that it is diverting market share that originally belonged entirely to SOL, even if the probability of the launch of XRP ETF is equal to or slightly lower than that of SOL.
complacency
Although this emotion is difficult to quantify precisely, intuitively I think that the arrogance of Solana has reached a bottleneck, forming a contrast to the situation a few years ago - when ETH caught up with SOL because of its superior position, and this position is like an unbreakable moat.
Here are some typical examples
1. 'Network Expansion vs L2'; DRIFT compares to HL, demonstrating a 'no mistakes' attitude;
2. Many people claim that 'no one would want to bridge from Solana to Base', despite clear counterexamples;
3. Some users who once firmly supported ETH completely capitulated weeks before ETH rose 35%. These people even suddenly predicted that the target price of ETHSOL would drop to very low levels (e.g. 0.027 ETHSOL).
Summary
In the next 30 days, I believe the attractiveness of Solana to marginal buyers is at its weakest level this year (the liquidity of ETFs is clearly insufficient compared to ETH; the attention to altcoins is more dispersed than before), while the selling motivation of marginal sellers is at its strongest at the same time (profit-taking; users who have gained huge profits through meme or holding SOL choose to sell to cash out and preserve value).
In addition, as the bulls attempt to push prices higher, financing costs remain high, and this rise is entirely driven by leverage, as evidenced by the recent (albeit brief) breakthrough of historical highs.
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