In contrast to last month’s meltdown, February so far has seen a rebound in enthusiasm for crypto. With some exceptions. One exception in particular: Solana (SOL-USD). Its performance in recent weeks has been mixed at best.
Largely, due to developments pertaining directly to it. On Feb 3, news of a cyberattack involving Wormhole, a bridge between Ethereum (ETH-USD) and Solana, caused SOL-USD’s rebound back above $100 per coin to lose momentum. The market has more or less absorbed this negative news. But as investors become bullish again for crypto, instead of diving back into this former favorite, they’re opting for the other major coins.
For example, Bitcoin (BTC-USD), which is, unsteadily, moving back toward $45,000 per coin. Ethereum is also on a relative upswing, staying at prices around $3,000 per coin. In contrast, SOL-USD has made little progress making up for its January losses. It’s at around $94 per coin today, down from around $178 per coin at the start of 2022.
Yet while its recent performance has been disappointing, there may be a silver lining. Beaten down and out of favor, you may want to consider it. If two things play out, there may be big upside potential for this hard-hit “Ethereum killer.”
Why Solana is Struggling to Make a Comeback
The recent cyber attack on Wormhole isn’t the only reason why SOL-USD has seen choppy performance since late last month. Past network issues continue to have a negative impact on its performance as well.
Before, I’ve discussed Solana and its questionable reliability. Its network has experienced multiple disruptions. Despite all the talk about its high speed, and other positives, this has likely dented confidence that this high-utility altcoin has what it takes to grab a large share of the decentralized finance (DeFi) market from Ethereum.
Even so, the fact that the market has gone from being overconfident about SOL, to worrisome about its prospects, could be something that works in your favor. Now a contrarian play within the crypto space, it may have ample upside potential.
Assuming, of course, that two things happen.
First, that the crypto recovery carries on. Instead of sinking it further into “crypto winter,” rate hikes actually have an indirect positive effect on the space. Second, this coin’s developers are able to repair Solana’s dented reputation. Both things may have a good chance of playing out.
How SOL-USD Could Get Out of its Recent Slump
In my recent crypto coverage, I’ve taken a bearish view on the space. Why? With interest rates rising, there will be a continued move out of riskier assets. Coupled with other negatives, like increased regulations, and the “crypto winter” could carry on into the spring, summer, and fall.
That said, I’ll admit that it’s not guaranteed to play out that way. In fact, per the view of one market commentator, Fundstrat’s Tom Lee, rising interest rates could end up being a positive. As rates rise, and negatively affect both bonds and speculative stocks, investors may decide to cycle into cryptos. The resultant inflows could keep this asset class on an upwards trajectory.
So, what could this mean for Solana? It’ll likely need more than just that to make a recovery. If it continues to have the reputation that its network is unreliable, it will continue to languish. But with its developers at work fixing network issues via upgrades, today’s perceptions about the reliability of its blockchain could reverse.
Along with new innovations, such as its recently launched Solana Pay protocol for e-commerce, confidence in this “Ethereum killer” could return, enabling it to rise back up to past price levels.
Bottom Line: Consider Solana a Cautious Buy
The risk/return proposition on SOL-USD may now be more favorable. Yet don’t take that to mean it’s become less risky. Further outages or cyber attacks could stymie its plans to restore its reputation. New developments like Solana Pay could fail to help it regain its status as one of the top contenders to grab the DeFi crown from Ethereum.
The above-mentioned bull case for crypto is also far from a slam dunk. Instead, my prior, more bearish take on where crypto’s heading could prevail. As interest rates rise, and the dollar regains strength, alternatives like this asset class could fail to thaw out from their “winter.”
Still, that doesn’t mean you shouldn’t buy it. Just keep these risks in mind when sizing positions. Remember that as recently as last summer, it was trading for less than a third of what it trades for today.
Sentiment about Solana has seen a big shift over the past few months. But given the prospect of the negative view of it swinging back to positive? Now may be the time to buy it. Even a partial recovery could mean big gains for contrarians taking the plunge today.
On the date of publication, Thomas Niel held long positions in Bitcoin and Ethereum. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Thomas Niel, contributor for InvestorPlace.com, has been writing single-stock analysis for web-based publications since 2016.