Decoding the reason why SOL price decreased nearly 10% this week

Solana's native token SOL experienced a 25.8% decline in just 11 days after reaching $126.30 on December 25, 2023. Some analysts may argue that the rally continues as the current price of 94.4 USD represents a 48% increase over the previous month. However, crypto traders tend to change their portfolios quickly when better opportunities arise. Investors are now questioning whether Solana's network activity confirms worsening sentiment towards the SOL price.

SOL price chart. Source: TradingView

Some analysts attribute SOL's recovery to the airdrop fever that swept the network after the newly launched JITO token was listed on major centralized exchanges on December 7, 2023, achieving capitalization market of over $300 million in the first few hours of trading. This success was followed by memecoin BONK on December 14, 2023, which caused Solana's Saga phone to sell out due to several airdrops targeting mobile phone owners.
However, the upward momentum is supported by a significant increase in volume in Solana's decentralized application (DApps) ecosystem. This comes despite many competing blockchains experiencing outages due to increased activity in December 2023, including Arbitrum, zkSync, and BNB Chain
After the initial craze for the Solana SPL token subsided, resulting in losses of 40%, 41%, and 44% for Jito (JTO), DogWifHat (WIF), and BONK, investors are asking questions. Is there anything else that supports Solana's $41 billion valuation that makes it the fourth-largest cryptocurrency excluding stablecoins?
When examining Solana's total value locked (TVL), it's clear that demand is decreasing, although that's not yet a point of concern.
Solana's TVL, measured in SOL terms, peaked at 15.4 million SOL deposits on December 19, 2023, but fell 17% to 12.8 million SOL on January 5, 2024.
One positive point is that the current TVL reflects a 13% increase over the previous month. For comparison, BNB Chain's TVL decreased by 12% in BNB terms during the same period, while the Avalanche network decreased by 8% in AVAX terms.
To better assess the impact of SOL's 9.7% weekly drop on Solana network demand, let's analyze activity in terms of DApps volume and active addresses. 7-day DApps volume ranking, USD. Source: DappRadar
Notably, Solana's performance declined in the seven days to January 5, 2024, with the focus being on active volumes and addresses. Furthermore, Solana's market share in terms of volume is 2.6%, which does not make it a direct competitor to more established blockchains like Ethereum or BNB Chain.
Furthermore, the reduced demand for Solana DApps spans all sectors, including DeFi, liquidity staking, gaming, social networks, and NFTs. For example, leading DEX Jupiter faced a 26% weekly drop in volume, while NFT marketplace Magic Eden saw a 24% drop in active addresses.
Having covered the three most relevant indicators of network usage, traders should now analyze whether retail investors using leverage have been affected by recent price action. . Perpetual contracts, also known as inverse swaps, include a fixed rate that is typically recalculated every eight hours. A positive funding rate indicates increased leverage demand among Long positions.
Funding rate 8 hours for SOL perpetual futures contract. Source: Laevitas
The latest data shows funding rates below 0.02% every 8 hours, or 0.3% weekly, which is negligible for most traders. This is in stark contrast to the 1.7% per week charged to leveraged longs (buyers) on January 2, suggesting the excess demand is no longer there. It is worth noting that funding rates remained positive when SOL fell below $100 on January 5, erasing gains made over the previous two weeks.
Considering the weakness in Solana's DApps activity and the waning interest in leveraged purchases, investor appetite for SOL appears to have leveled off. Perhaps a new wave of airdrops will hit the market and attract more interest, but the recent 9% correction appears to be in line with reduced demand for the Solana network.