Solana: CoinShares’ outlook – short, medium, and long term

Solana’s growth was one of the main stories of 2024. Despite a notable comeback following a significant setback after the FTX collapse, the network and its underlying asset still face challenges in solidifying their status as institutional-grade. In this article, CoinShares explores the potential outcomes for the network.

1. Declining Activity & Market Rotation

Solana’s network activity has trended downward since its significant spikes around Trump’s inauguration. The Solana-Libre-Milei controversy further damaged sentiment although seems to be largely blown over now), exposing criminal activity among projects within the ecosystem. Consequently, capital flows on deBridge rotated toward Ethereum and Arbitrum—chains perceived as more reliable due to their Lindy-effect resilience, battle-tested code, strong security guarantees, and decentralisation.

2. FTX Estate Unlock & Selling Pressure

Solana’s weak price performance may be linked to the scheduled unlock of 11.2 million SOL from the FTX estate in March (~2% of total supply), potentially introducing approximately $828 million in selling pressure, assuming a 50% sell-off at $148 (the price on the day). Initially, this appeared to be a bullish event, as SOL’s circulating supply increased by two percentage points, bringing it closer to its fully diluted valuation and adding $15 billion to its market capitalisation within two days. However, this rally was short-lived. Large institutions such as Galaxy, Pantera, and Figure, which participated in previous FTX auctions and collectively hold billions in unrealised gains (with ROIs ranging from 33% to 113%), likely sought to exit their positions. This, coupled with weak altcoin price action, deteriorating sentiment, and an increasingly uncertain macroeconomic backdrop, led to a swift reversal in price momentum.

Historically, large unlocks haven’t always led to price declines. In early 2021, despite Solana’s circulating supply rising 5.69x, its price increased 60%—likely due to low liquidity preventing immediate sell-offs and, instead, institutional accumulation driving retail FOMO. However, this time is different: Solana is now far more liquid, and institutions were holding significantly larger unrealised gains amid a deteriorating outlook for both the crypto and traditional financial markets.

NB: the table above is a conservative estimation based only on publicly available data. Galaxy reported in Q3 2024 that its SOL position was in “excess of a billion dollars.” Auction details remain limited (as most deals were done OTC at significant discounts to market price). In total, the whole SOL FTX estate is 8% of supply.

3. Unlock Precedent

Historically, large unlocks haven’t always led to price declines. In early 2021, despite Solana’s circulating supply rising 5.69x, its price increased 60%—likely due to low liquidity preventing immediate sell-offs and, instead, institutional accumulation driving retail FOMO. However, this time is different: Solana is now far more liquid, and institutions were holding significantly larger unrealised gains amid a deteriorating outlook for both the crypto and traditional financial markets.

4. A potential change in Solana’s supply

Multicoin’s proposal to transition Solana’s supply schedule from a time-based formula (decreasing by 15% annually until it reaches 1.5%, where it remains fixed) to a market-based algorithm failed, meeting the 33% quorum but falling below the 66.67% threshold at 61.39%.

The core thesis behind this proposal to change the emission schedule to a market-based formula is predicated on the idea that protocol activity should continue to thrive, given its historical success—especially over the past year.

We wrote about the reasons why stakers would vote in favour or against the proposal here. Despite the proposal failing, the vote itself was arguably a success, demonstrating the strength of the Solana ecosystem. Over participated, making this the largest crypto governance vote in history—both in terms of the number of participants and the total market capitalisation represented across any ecosystem, chain, or network.

For context, while Solana’s market capitalisation stands at $64 billion today, Bitcoin’s market cap was only $20 billion during the highly contentious Blocksize Wars in March 2017. SIMD-228 served as a significant social stress test, reinforcing Solana’s decentralisation. A diverse range of stakeholders participated in the vote, including small and large validators, stakers, ecosystem developers, core contributors, institutions, retail investors, exchanges, wallets, and applications—many of whom wield significant influence or capital.

5. Long-Term Outlook Remains Positive

Once the criminal activity is flushed out, exposed from the Libra-Milei-Solana debacle—which is similar to the 2022 FTX/3AC drawdown—and sentiment resets, upward price action could resume. 

Several catalysts support Solana’s long-term potential: Firedancer upgrade is expected to enhance client diversity and improve throughput, therefore improving protocol stability and reducing downtime, and improving UX and performance. A strong brand, marketing momentum and an agile and aligned developer community. Finally, strengthening network effects: Particularly in DeFi, payments, and DePIN industries. 

That said, Solana remains in a competitive battleground against Ethereum’s L2s, as well as emerging players like Sei, Aptos, Sui, and more recently, Hyperliquid. It is still too early to tell who will win, but Solana has a decent and improving chance.

Further, there is also a high chance that a spot SOL ETF could be launched in the US given the change in the white house and more pro-crypto SEC. Polymarket has the odds of an approval in 2025 at 84%.  The factors contributing to this likelihood include a high correlation across exchanges, reducing the risk of market manipulation. Increasing SOL trading volumes on both centralised and decentralised platforms, reflecting its growing demand. And, finally, rising institutional presence, with approximately 1.8% (8.8 million out of 488 million circulating supply) of SOL’s supply held in ETPs. Although this remains below Ethereum’s 4.2% (5.06 million out of 120 million coins) and Bitcoin’s 5.8% (1.23 million out of 21 million coins), institutional adoption is expanding.

6. Undervalued Relative to Ethereum

Solana is now competitive with Ethereum (or leading, in some instances) across key metrics including trading volumes, fees, application quality—yet it trades at only 25% of Ethereum’s valuation.

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