Solana (CRYPTO:SOL) has been in a pronounced downtrend lately. Starting off the year at US$173, it is all the way down to US$87, as of this writing. It has been a painful thing to watch. Although most cryptocurrencies have been in a funk this year, SOL has sold off harder than most. In the same period in which SOL fell 49%, Bitcoin (CRYPTO:BTC) fell only 19%, and Ethereum (CRYPTO:ETH) fell 27%. The latter coin has received some publicity for its steep sell-off this year, which has been worse than many other cryptocurrencies, but even it hasn’t fallen as much as SOL has.
The question investors need to ask themselves is, “Why is this happening?” Solana is considered a sophisticated decentralized finance (DeFi) token, with many transactions per second and a robust developer community. Due to its similarities with Ether, it has often been referred to as an “Ethereum killer.” Given all of this hype, you might think that SOL should be going up instead of down. However, the comparisons to ETH may in fact be precisely why SOL is doing so poorly this year, as I’ll show in a moment.
Why SOL is going down One of the big reasons SOL is going down right now is because cryptocurrencies in general are going down. Cryptocurrencies are generally very correlated with one another, and most cryptocurrencies are having a bad year so far in 2022. As mentioned previously, Bitcoin is down about 19% as of this writing, and smaller cryptocurrencies in many cases are down more.
One cryptocurrency that’s doing quite poorly this year is Ether. Down 27% year-to-date, it is faring worse than Bitcoin. One possible reason it’s doing so badly is because people seem to be losing interest in non-fungible tokens (NFTs). NFTs are unique tokens that point to digital assets. They are popularly bought and sold on the internet, as people believe that they confer “ownership” of the assets they are associated with. Whether you really “own” an image because an Ethereum-based token points to it is debatable, but people nevertheless got heavily into NFTs last year, as a form of digital art collecting. It was a boon for Ether, the cryptocurrency used to buy and sell NFTs. Most NFTs are sold on the Ethereum blockchain, so people naturally used Ether to buy and sell them. Unfortunately, a quick Google (NASDAQ:GOOGL) Trends search shows that NFTs peaked in popularity in early January, and have been trending downward in interest since then. So, the declining interest in NFTs may be driving ETH’s price lower.
It may be the same story with Solana. SOL, like ETH, is a DeFi token that lets users build decentralized applications. Like ETH, it had NFT marketplaces, only they were always a lot less popular than Ethereum’s own. So you’ve got Ether tanking on the lack of NFT momentum, and Solana, which is similar but less popular, tanking even more. It could be that the two events are correlated.
Foolish takeaway Ultimately, the reason SOL is going down is because there’s more selling going on right now than buying. That’s pretty much the short version of it. But if you want to know why people are selling, you may want to look at Ether and the decline in popularity of NFTs. It appears that Solana’s fate is somewhat connected to that of the broader DeFi universe.
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Fool contributor Andrew Button has no position in any of the stocks mentioned. The Motley Fool owns and recommends Bitcoin and Ethereum.