Why did Solana crash more than other cryptos after the FTX collapse?

All the connections between Solana, SBF and FTX causing Sol prices to crash further than BTC & ETH

So why did Solana (Sol) crash so hard during the fall from grace of Sam Bankman-Fried, his crypto exchange FTX and his trading firm Alameda Research?

The cryptocurrency market can be extremely volatile, especially when we have events such as the FTX collapse. However, in the case of the Solana ecosystem, there is more to the story. There were direct connections between Sol, FTX and Sam Bankman-Fried.

Here's everything that you need to know about the current state of affairs as of November 2022, starting with some context about the Solana network.

What is Solana Crypto?

Solana is an open-source blockchain protocol that went live in 2020. technically speaking it is still in Beta but reports suggest that even with the intermittent network issues it should go "live" within the next 6 months.

It was originally conceived as a decentralised stock exchange but more recently became one of the top smart contract ecosystems and one of the top "Ethereum-killer" contenders.

The Solana Blockchain aims to provide high throughput and scalability for decentralized applications (apps). It is designed to be accessible by both developers and users.

Solana initially raised a total of $25m across various ICOs between 2018 and 2020 and then a subsequent $314m from crypto VCs in 2021.

The unique element of the Solana blockchain (compared to EVMs for example) is that although it works off Proof of Stake, it uses a novel timestamping system called Proof of History. This consensus mechanism allows processing up to 65k transactions per second.

Who is behind the Solana Ecosystem?

Solana was founded by CEO Anatoly Yakovlev and CTO Greg Fitzgerald. They had previously worked at Qualcomm together. They established the Solana Foundation, a non-profit entity that operates the Solana network.

The foundation has been backed by venture capital firms such as Polychain Capital, Pantera Capital and others. These firms have invested over $314m into the project since 2021.

The Foundation itself also provides grants and resources to developers who want to build applications on top of the protocol.

What happened to Sol Prices during the FTX collapse?

The Collapse of FTX

In the latter half of November, the price of Solana's token, SOL, dropped sharply. Prior to this precipitous decline, we saw it increase from $28 to $37 between October 5th and November 5th. Just after that, however, the FTX crypto exchange completely collapsed, resulting in a market crash.

Within a few days, the SOL had dropped below $13. At the time of writing this, the SOL price had hit a low of $11, something not seen since early 2021. This saw almost $700M of Sol value wiped out.

The technical analysis picture for SOL isn't the best. The price of SOL broke down from the long-term support area with an average price of $29 during the week of Nov. 14 – 21.

This was the continuation of a negative trend that began at the peak value. A similar decrease occurred throughout all crypto markets.

Although we have seen a bounce and signs of life in the Sol price, it's worth noting that if this is temporary and the price decreases continued, the next support area will be around $4.40, a 62.40% decline total.

The $13 area is now likely to act as a key area of support moving forward. As we move towards the end of the year, it's important to see whether this support holds or the Sol prices break down further.

What were the causes of the Solana Crash?

The crypto market as a whole was badly hurt because of the FTX crash, with Bitcoin losing approximately 25% of its total value. The majority of altcoins lost more than 30%. A few coins experienced much worse losses, including Solana's SOL token.

Given that the Solana project had ties to Sam Bankmann-Fried's FTX and Alameda Research, public trust in the project took a nose dive.

Even before the FTX tragedy, some warned about Solana, as they saw it as an incredibly risky project. Also, during the bull market, we have seen more frequent performance issues because of network overload.

How did Crypto Exchanges react to the Solana crash?

On Nov. 17, Binance announced that it would stop receiving deposits of USDT and USDC on the Solana network for a set period of time.

The deposits resumed on Binance, however the same could not be said for BitMex, Bybit, or OKX.OKX delisted the stablecoins which lessened the exposure from FTX.

On Nov. 18, the Stablecoin issuer Tether decided to convert $1 billion USDT from Solana tokens to ERC-20 tokens, which are used in the Ethereum blockchain. The news came after the FTX collapse since Solana had close ties to the now-bankrupt exchange.

Though this was discouraging news, Solana co-founder Anatoly quickly dismissed any worries about these growing expenses and said that their treasury has 30 more months of financial runway before it becomes an issue.

So what are Solana's links with SBF & FTX?

FTX and Alameda Research were two of the biggest investors in Solana and had the highest market share among exchanges trading SOL tokens.

On the flip side, the Solana Foundation released a fact sheet that detailed its exposure to FTX following the company's bankruptcy.

As of November 6th, the organization held cryptocurrency assets worth over $180 million from FTX.

Specifically, the foundation’s report highlighted that Solana held approximately $1 million in cash on FTX. The non-profit said these funds were negligible to its operations and only accounted for less than 1% of its cash reserves.

Though no Solana (SOL) was held on FTX, approximately 3.43 million FTX (FTT) tokens and 134.54 million Serum (SRM) belonging to the foundation are now stuck on the exchange. Furthermore, the group owned 3.24 million shares of FTX common stock.

CoinGecko reports that FTT was trading for over $22 per coin at the time, while SRM was worth around $0.8 each. If we go by the foundation’s numbers, that equals $75.46 million of exposure to FTT and $107.6 million of exposure to SRM respectively.

As of the time of writing FTT is trading for only $1.36 and SRM traded for $0.27, a huge decline from the pre-FTX crash numbers.

The story gets worse with many other Solana protocols and projects having connections to FTX. This is best seen with the depegging of various Wrapped tokens on Solana.

As the success of a smart contract ecosystem on the crypto market is partially defined by the success of the projects on the platform, the more protocols that go under the further the Sol price will decline.

Is there any hope for Solana?

Hope for Solana

In the short term, there is a lot of sell pressure with investors operating under extreme fear and trying to manage their own risk by getting out of their Solana-based investments. As mentioned above, holding the support of $13 will be key to stemming further decline.

There are also blockchain projects dubbed the Solana-killers (eg Aptos) that are biting at Solana's heals, waiting for their chance to take the mantel.

We have seen some recovery (late Nov), with Sol prices now over the $14 mark. For this recovery to continue, we'd need to see the price breakthrough the major resistance of $15.

Some investors might see this price point as an incredible entry, particularly if the price reaches old all-time highs of $250.

Solana does have an incredible community of developers and investors, which have continued to trade and operate throughout this downturn.

However only time will tell whether the future outlook is positive. I such a significant move to the upside is possible, it will take a long time to get there.

About the Author

James Killick

Founder of Chainwiz and crypto tech specialist.