The hidden worries after overconfidence: Why Solana may stumble in December?

Original author: The Giver

Reprint: Daisy, Mars Finance

Here are some brief thoughts on Solana, mainly discussing why I think 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, it should be noted that I also hold short positions in other assets (such as BTC, as the gap between Saylor’s buying price and ETF continues to widen; and I also believe that if Ethereum falls, its downward trend may continue for a longer time).

In summary, Solana’s performance this year has not yet truly been tested, 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 driving Solana’s performance to become the best YTD performer among scalable assets this year include the following:

1. A more active and diversified ecosystem than competitors, with fast transaction speed;

2. The most powerful ‘casino’ environment has attracted many meme participants willing to use SOL as the unit of account;

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 degree of “existential crisis” in future asset allocation.

Today, I think all three of these drivers have waned and are extremely vulnerable to shocks, with plenty of excess bubbles still to be cut. Here are my specific reasons:

As a leading L1 with a focus on speed and diversity, Solana is facing strong competition from HYPE and ETH/Base.

The rise of these threats is unexpected and has not yet been effectively addressed.

The following figure shows the traffic data of Artemis. You can choose to observe it within a time range of 1 week or 1 month. This is the most significant transfer of Solana funds to the EVM so far this year, which is not only reflected in the traffic. We can also observe from popular case studies, such as the meme coin sector in the AI field. Projects like GOAT, FARTCOIN, ZEREBRO, and AI16Z, which were considered top projects, have all halved in valuation during this period, while the VIRTUAL and proxy ecosystems have flourished.

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, its 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 the MTGOX incident and regulatory issues with BTC, as well as the launch of ETFs for Ethereum. Solana, on the other hand, has been virtually unaffected, with only a brief fluctuation during the Jump dumping period this summer, which was quickly overlooked as the subsequent larger pullback in ETH diverted attention.

Solana has been the best performing period in the past few months as a high beta asset to BTC, taking away most of the funding from the ETH network (this trend has gradually dissipated), while attracting much more attention than mediocre and unattractive small AltCoins.

In the field of liquidity funds, there should only be two choices for GP to achieve cash distribution in the 2024 fiscal year:

1. Distribute according to the percentage of realized gains;

2. Allocate based on the percentage of unrealized gains, but adjust based on the previous year’s high watermark Benchmark.

In either case, given Solana’s outstanding performance last year, I think the fund managers would tend to dumping SOL, reasons may include:

a) As the best-performing asset of the year, it has achieved a significant increase;

b) It is considered that there is still untapped upward potential in the previously underperforming parts of the investment portfolio, which is more worth capturing profits 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, dumping one-third of the Lock-up Position supply purchased near the historical high point, and then ‘reclaiming’ these Tokens in the first unlock event in March next year to gain the price difference in nominal value.

The withdrawal of SOL ETF’s Liquidity has weakened due to the rise of established Tokens and the potential impact of XRP ETF.

XRP’s performance is driven by two main factors:

a) It is considered the most likely asset to launch an ETF product after ETH, closely related to Bitwise;

b) Rumors about the reduction of US Cryptocurrency capital gains tax to 0%.

Considering XRP’s pedigree (as one of the earliest encryption assets) and the resignation of SEC Chairman Gary Gensler, it cannot be denied that it is diverting market share that originally belonged entirely to SOL, even though the probability of the launch of XRP ETF is on par or slightly lower than that of SOL.

Self-satisfied sentiment

Although this kind of emotion is difficult to quantify accurately, intuitively I believe 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 impregnable moat.

Here are some typical examples

1. ‘Network extension vs L2’; DRIFT compared to HL, demonstrating a ‘never make mistakes’ attitude;

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 the ETH pump of 35%, even suddenly predicting a target price for ETHSOL to 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 point this year (ETF Liquidity is clearly insufficient compared to ETH; the attention of AltCoins is more dispersed than before), while the selling motivation of marginal sellers is at its strongest (taking profits; users who have gained huge profits through meme or holding SOL choose dumping to cash out and hedge).

In addition, as longs try to push the price pump, the financing cost continues to remain high, and this pump is completely driven by leverage, which is reflected in the recent (but brief) historical highs.