Glassnode: What caused SOL to surge 2143% in the past two years?

summary

• Since its cycle low in November 2022, Solana has outperformed both Bitcoin and Ethereum as measured by price appreciation and relative capital inflows.

• Continued positive capital inflows resulted in a net liquidity increase of USD 55 billion, providing a significant impetus for price appreciation.

• Despite significant profit-taking and distributions, Solana investors have not yet reached the point of unrealized profitability (paper gains), which has historically aligned with long-term macro tops, suggesting further growth throughout the cycle.

Comparison of SOL, BTC and ETH

Solana has attracted a lot of interest and attention from investors and market speculators over the past 4 years. Initially, the asset saw huge growth during the 2021 bull run, but then faced major challenges after the FTX debacle, which led to a severe oversupply.

After plummeting to a shocking low of $9.64, Solana has staged a remarkable recovery, posting an incredible 2,143% growth over the past 2 years. This impressive price performance has seen Solana outperform Bitcoin and Ethereum on 344 out of 727 trading days since the FTX incident, demonstrating the massive growth and demand for the asset.

The surge in price action has also attracted a large amount of new capital into the asset. We can use the relative realized cap changes of Solana, Bitcoin, and Ethereum as a metric to assess and compare the capital flows into each network.

Since its December 2022 low, Solana’s capitalization percentage growth over 389/727 trading days is far higher than that of Bitcoin and Ethereum, highlighting its significant growth in liquidity.

To assess demand-side momentum, we can track capital inflows from new investors, which is known as the “hot realized cap.” This metric measures capital held in active accounts over the past seven days.

When comparing the size of new capital entering the asset between Solana and Ethereum, we can observe that Solana’s new investor demand surpassed Ethereum for the first time in history, highlighting its strong demand profile.

Notably, Solana’s popular realized cap rises sharply before early 2024, marking an upward inflection point in the SOL/ETH ratio, with an influx of new capital driving growth.

Exploring SOL Capital Flows

Having established Solana’s outperformance relative to other major assets, we will now examine the size and composition of Solana’s capital flows.

By evaluating the Net Realized Profit/Loss metric, we can visualize the daily changes in capital flows on the Solana chain. When this metric is positive, it represents net capital creation (money trading profits); when the metric is negative, it represents net capital creation (money trading losses).

We observe that Solana has maintained positive net capital inflows since early September 2023, with only small capital outflows during this period. The continued inflow of liquidity has helped stimulate growth and price appreciation, reaching a staggering peak of $776 million in new capital inflows per day.

We can use the coin age breakdown of the realized profit metric to assess which subgroups are contributing most to the sell-side pressure. Here, we calculate the cumulative profit-taking volume by coin age since the beginning of January 2nd.

• 24 hours: $3.1 billion

• 1 day-1 week: $13.7 billion

• 1 week-1 month: $14 billion

• January-March: $8.5 billion

• June-December: $15.7 billion

• 1 to 2 years: $8.2 billion

• Years 2 to 3: $8.2 billion

• 3 to 5 years: $3.5 billion

Notably, tokens with ages of 1 day-1 week, 1 week-1 month, and 6 months-12 months were significant contributors to sell-side pressure, each recording sizable profits. Together, they accounted for 51.6% of realized profits, showing a balanced distribution of market influence. This underscores the notion that Solana, as an asset, is viewed as an investment opportunity for all types of investors.

During the same period, massive capital inflows enabled Solana to accumulate over $55 billion in USD liquidity, increasing the realized cap from $22 billion to a staggering $77 billion.

Is the SOL market overheated?

In the previous section, we assessed a large amount of profit taking and supply allocation, so it becomes cautious to assess the degree of overheating in the market.

To this end, we can use the MVRV ratio to define pricing ranges to assess extreme deviations of investor profitability relative to the long-term average. Historically, breakouts above 1 standard deviation have coincided with long-term macro tops.

Currently, SOL prices are consolidating between the mean and the +0.5 standard deviation range. This indicates a relatively hot market, but also suggests that there may be further room to run before profits held by ordinary investors reach the extreme range of +1σ, triggering a series of profit-taking and distribution.

Summarize

With the release of new segmented metrics, we are able to analyze for the first time investor behavior during dynamic markets for Solana assets, providing important information on the mechanisms of capital creation and destruction.

Solana’s rapid recovery and subsequent price increase has been remarkable, and it has managed to raise significant capital from both institutional and retail investors.