One of the market’s most explosive cryptocurrencies is taking a beating.

Keith Noonan

Key Points

  • The Federal Reserve is gearing up for some big changes, and they could spell trouble for Solana’s cryptocurrency.

What happened

Recent comments from the Federal Reserve have prompted a major sell-off for high-risk investments, and Solana (CRYPTO:SOL) has been impacted by the pullback. The blockchain network’s SOL cryptocurrency is down roughly 16.5% over the past week as of 4 p.m. ET on Friday, according to data from S&P Global Market Intelligence.

Transcripts of a Federal Reserve meeting held in mid-December were published on Wednesday, and the contents have riled the market and led to steep sell-offs for growth-dependent stocks and cryptocurrencies. In addition to significantly cutting back on bond purchases and raising interest rates, the Fed may also reduce its holdings in Treasury bonds and mortgage-backed securities, according to the recently published meeting transcripts. Add it all up and investors are looking at a much less favorable backdrop for growth stocks and cryptocurrencies. 

A dollar breaking into blocks.

Image source: Getty Images.

So what

Cryptocurrencies have sometimes been touted as a decentralized investment alternative that can offer protection from the whims of central banks and stock market volatility. However, recent trading suggests that digital tokens are hardly immune to macroeconomic pressures. While leading cryptocurrencies have produced stellar returns in recent years, the Fed’s recent comments pointing toward a more challenging environment for growth-focused and speculative investments have clearly created bearish pricing pressures. 

Now what

Even with the recent pullback, Solana’s cryptocurrency is still up roughly 6,870% over the past year of trading. The SOL token has skyrocketed thanks to speculative momentum and surging interest in the Solana blockchain ecosystem. Solana provides a network for executing smart contracts and building decentralized finance (DeFi) applications, and its rapid transaction speeds have helped it generate excitement among developers and investors.

For comparison, Ethereum‘s blockchain network is currently capable of handling roughly 13 transactions, but Solana can process up to 50,000 transactions per second. Ethereum still stands as the leading network for building cryptocurrencies and DeFi applications, and it sports a market cap of roughly $382 billion. Meanwhile, Solana now has a market capitalization of roughly $43.5 billion.

It’s possible that Solana’s SOL token will continue to climb if the underlying network continues to offer transaction processing advantages and attract engagement from developers, but investors should keep the token’s risk-reward dynamic in mind. The SOL token has already posted stellar gains, and the overall macroeconomic backdrop could create a more challenging backdrop for cryptocurrencies this year. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

Keith Noonan has no position in any of the stocks mentioned. The Motley Fool owns and recommends Ethereum. The Motley Fool has a disclosure policy.