Over the last several days, an event of nightmarish proportions rocked the space of crypto. One of the largest crypto exchanges, Sam Bankman-Fried’s FTX, is on the brink of bankruptcy after the company could not fulfill its obligation of returning its customers’ crypto assets held at the company. FTX has admitted that it is in a $8 billion shortfall, which the company is at the moment, trying desperately to raise funds to make up for. As market watchers were appalled at how a firm as large as FTX was misappropriating customer assets, the unravelling of events escalated very quickly, with the price of crypto assets tanking sharply as panicky investors sold their crypto holdings and traders took the opportunity to short the market, creating cascade upon cascade of selling, which eventually led to margin forced liquidations of more than $1 billion in long positions, one of the highest amount of long liquidations to occur in the cryptoverse within 24-hours.
The liquidation of leveraged positions has become a key driver of crypto market meltdowns ever since leveraged trading became available. This time around, it was no different, sending the price of popular cryptos down an average of 35% over two days. However, other than FTT, which is the utility token of the FTX exchange, understandably undergoing an implosion, there is one blockchain token seemingly unrelated to FTX that is also cracking under immense pressure - that coin is Solana (SOL). The price of SOL has plunged by around 60% within a span of 2 days from $36 to a low of under $14 in the crossfire, far more than the average 35% fall in most other non FTX-related coins.
Why is Solana Falling More than Others?
The reason for SOL’s seemingly exaggerated move is largely due to the holdings of Alameda, the sister hedge fund firm of beleaguered FTX.
According to the balance sheet information that Coindesk exposed in the now famous article that broke FTX, SOL is Alameda's second-largest holding behind FTT, and not only that, the hedge fund also holds significant amounts of SOL ecosystem tokens like MAPS and OXY, which have also plummeted similarly as SOL. Should these tokens be sold by Alameda to meet capital calls, it could further impact the price of SOL in a negative way. However, the immediate threat to SOL is Alameda’s large holding.
According to the Coindesk report, Alameda's balance sheet showed that the firm held $292 million of “unlocked SOL,” $863 million of “locked SOL” and $41 million of “SOL collateral”, which added up to about $1.2 billion worth of SOL when it was still trading at around $37. This would work out to be about 32.5 million SOL tokens that Alameda could potentially and highly likely be forced to dump. As the real-time events of the FTX crumble unfolded, all the tokens that Sam Bankman-Fried had invested in were hit by waves and waves of selling pressure. As soon as FTX halted withdrawals on Tuesday, a large number of investors who had funds stuck in FTX took to shorting FTT and SOL at other exchanges to milk some quick gains to compensate for their stuck funds.
To make matters worse, due to the nature of the Solana blockchain, Solana validators could stake and lock their SOL tokens on DeFi platforms for 1 epoch (approximately 48 hours in the case for Solana) to earn staking rewards. As the deterioration of the entire saga took less than 36 hours, a large part of SOL tokens were still locked onchain when its price initially tumbled, which meant that these stakers had no chance to react to the market selloff. However, since these SOL tokens unlock every 48 hours, the next unlock could happen anytime soon, which could make matters a whole lot worse for the price of SOL should their holders start to dump. Not many holders will have the option of holding as there were many holders of SOL who took loans from DeFi platforms using SOL as collateral to buy more SOL to stake; should the price of SOL continue to fall, these accounts could be liquidated onchain.
One particular account that has got market watchers’ attention is a SOL whale account in a DeFi platform which has 2,095,598 SOL in collateral (around $31 million value as at time of writing) but has 48,038,000 USDC in debt. This means that this account is at a high risk of liquidation, which could drag down the price of SOL much further. As a result of such knowledge, many SOL holders who are not in a margin trade have also taken to selling their SOL first to buy back at a lower level.
An example of an investor who is not taking chances and is selling SOL ahead of the unlock is FundStrat. According to Sean Farrell, head of digital asset strategy at research firm FundStrat, who wrote in a note to their investors on Tuesday evening, “A reduction in the amount of SOL staked might indicate that investors are looking to sell all or part of their position. Due to these factors, we think it is wise to reduce exposure to Solana (SOL) in the immediate term.” Despite his near-term bearish call on SOL, Farrell said he expected there is an ability for the Solana ecosystem to “eventually recover and remove itself from Alameda’s shadow.” That time, unfortunately, is not now.
According to blockchain data, there are about 55 million SOL tokens that are scheduled to be unlocked today. These “scheduled for unlocked” SOL tokens represent around 15% of the token’s circulating supply, which is in no way a small amount of tokens. The entire crypto market continues to trade on tenterhooks as the unlock approaches and as market watchers await for more updates to the still very fluid situation that is unfolding.
The last we heard, Justin Sun of Tron blockchain is said to be putting together a consortium to try and rescue FTX, while there are rumours that the Solana blockchain has been halted to prevent the large SOL whale from being liquidated and causing more carnage. We will keep our eyes and ears peeled and update should there be further new developments.