Solana (SOL -1.85%) is arguably the hottest crypto on the planet right now, even hotter than Bitcoin (BTC 0.53%). Over the past 30 days, Solana is up a scorching 65%, and for the year, Solana is up an even more sizzling 220%.

Clearly, all signals are now flashing green for investors, and it might seem illogical to argue that such a super-hot crypto is not worth adding to your portfolio. But just remember -- last year, Solana sank by more than 90%. So even with its stellar performance thus far in 2023, Solana still sits 88% below its all-time high of $260 from just two years ago. If you are thinking about investing in Solana, here are three questions to ask yourself.

Has investor sentiment turned in Solana's favor?

One of the biggest factors affecting Solana's meteoric rise this year has been a change in market sentiment. Simply stated, investors are starting to view Solana more positively, and this improving sentiment in the crypto market is sending Solana higher.

It's impossible to talk about a change in market sentiment without talking about FTX, its founder Sam Bankman-Fried, and Alameda Research (the hedge fund closely affiliated with FTX). When FTX collapsed last year, Solana was one of the hardest-hit cryptocurrencies, due to its close relationship with FTX. Sam Bankman-Fried was an early investor in Solana, and both FTX and Alameda owned a huge supply of Solana tokens. Thus, the thinking at the time was that an FTX bankruptcy would trigger a fire sale of these tokens, sending the price of Solana plummeting. 

But that hasn't happened, and the criminal trial of Sam Bankman-Fried this fall hasn't brought any new earth-shattering revelations that might negatively affect Solana. So a lot of the risk that formerly hung over Solana now appears to be dissipating.

Has regulatory risk decreased?

The overall regulatory climate for crypto is also improving. There was a big scare early this summer, when the SEC named Solana as one of the unregistered securities that crypto exchanges Binance and Coinbase Global were offering to their customers. While the SEC took no formal enforcement action against Solana, it was nonetheless very unsettling.

But it now looks as if the legal momentum is shifting in favor of crypto. This shift first started in July, when the SEC lost a major court battle in its campaign against embattled cryptocurrency XRP (XRP 0.28%). With every new legal win for XRP, the thinking goes, the overall regulatory environment is becoming safer for Solana. So this, too, is adding to the buzz around Solana.

Will institutional investors keep buying Solana?

Another key factor affecting Solana's sizzling performance has been a huge influx of institutional money. CoinShares, which tracks the inflow and outflow of institutional funds into crypto, continues to report strong growth in Solana's inflows. There have now been positive inflows into Solana in 28 of the 32 weeks of this year, and Solana recently posted its biggest influx of new money since March 2022.

Even more impressively, Solana seems to be taking over from Ethereum (ETH 0.23%) as the altcoin of choice for large institutional investors. Until this year, it was conventional wisdom that, after Bitcoin, Ethereum was the top option for institutional investors. But now that thinking seems to be changing. According to CoinShares, money is flowing into Solana, but not into Ethereum. In fact, Ethereum has been reporting net outflows of money. If you believe that institutional money is the smart money, then this signal should be a huge positive for Solana.

Solana price target

The decision to add Solana to your crypto portfolio basically comes down to one final question: Has Solana's risk-reward profile changed fundamentally over the past 12 months? If you think it has, then it could be worth accumulating Solana now, while it's still relatively undervalued. However, if deep in the pit of your stomach, you fear that the SEC could step in and spoil the party, then maybe Solana is not for you. 

From my perspective, a key price level for Solana is going to be $39. That is approximately where Solana was trading before FTX imploded last year. If Solana can make it all the way back to $39 from today's price of $32, it will be a strong signal that the FTX-induced hangover is finally over, and that it is finally safe to start buying Solana again.