- Crypto markets soared in Q4 2024[1], as measured by the FTSE/Grayscale Crypto Sectors family of indexes. The gains largely reflected a positive market reaction to the U.S. election result.
- Competition remained fierce in the Smart Contract Platforms Crypto Sector. Category leader Ethereum underperformed Solana, the second-largest asset by market cap[2], and investors increasingly focused on alternative Layer 1 networks like Sui and The Open Network (TON).
- We have updated the Grayscale Research Top 20. The Top 20 represents a diversified set of assets across Crypto Sectors that, in our view, have high potential over the coming quarter. The new assets this quarter are HYPE, ENA, VIRTUAL, JUP, JTO, and GRASS. All the assets in our Top 20 list have high price volatility and should be considered high risk.
Grayscale Crypto Sectors provides a comprehensive framework for understanding the universe of investable digital assets and how they relate to the underlying technology. Based on this framework and in partnership with FTSE Russell, we developed the FTSE Grayscale Crypto Sectors Index Series to measure and monitor the crypto asset class (Exhibit 1). Grayscale Research incorporates the Crypto Sectors indexes into its ongoing analysis of digital asset markets.
Exhibit 1: Positive returns for our Crypto Sectors index in 2024
Crypto valuations surged in Q4 2024, largely due to the favorable market reaction to the U.S. election result. Based on our comprehensive Crypto Sectors Market Index (CSMI), total industry market capitalization increased from $1 trillion to $3 trillion during the quarter.[3] Exhibit 2 compares total crypto market capitalization to a variety of traditional public and private market asset classes. For example, the market cap of the digital assets industry today is roughly comparable to the market cap of the global inflation-linked bond market — more than twice as large as the U.S. high-yield bond market, and still significantly smaller than the global hedge fund industry or the Japanese equity market.
Exhibit 2: Crypto market cap increased by $1 trillion in Q4 2024
Reflecting the increase in valuations, many new tokens qualified for inclusion in our Crypto Sectors framework (which uses a minimum market cap of $100 million for most assets). This quarterly rebalance we added 63 new assets to the index series, which now includes a total of 283 tokens. The Consumer & Culture Crypto Sector added the most new tokens, reflecting continued strong returns for memecoins as well as appreciation in a variety of assets related to gaming and social media. The largest addition to Crypto Sectors by market cap was Mantle, an Ethereum Layer 2 protocol, which now meets our minimum liquidity requirements (see here for more detail on our index inclusion criteria).
Smart Contract Competition
The Smart Contract Platforms Crypto Sector may be the most competitive market segment in the digital assets industry. While 2024 was a landmark year for category leader Ethereum — which was approved for spot exchange-traded products (ETPs) in the U.S. and went through a major upgrade — the Ether token underperformed certain competitors including Solana, the second-largest asset in the category by market cap.[4] Investors also directed attention to other Layer 1 networks, including high-performance blockchains like Sui as well as TON, a blockchain integrated with the Telegram messaging platform.
In creating the infrastructure for application developers, the architects of smart contract blockchains face various design choices. These design choices impact three factors that make up the “blockchain trilemma”: network scalability, network security, and network decentralization. For instance, prioritizing scalability often manifests in high transaction throughput and low fees (e.g., Solana) while prioritizing decentralization and network security may result in lower throughput and higher fees (e.g., Ethereum). The specific design choices result in a wide range of outcomes for block times, transaction throughput, and average transaction fees (Exhibit 3).
Exhibit 3: Smart contract platforms have different technical features
Regardless of design choices and a network’s strengths and weaknesses, one way smart contract platforms derive their value is through their ability to generate network fee revenue. We’ve written before how fee revenue can be considered the primary driver of value accrual for tokens in this market segment, though other metrics like Total Value Locked (TVL) are important to consider as well (The Battle for Value in Smart Contract Platforms). As shown in Exhibit 4, there is a statistical relationship between the smart contract platform fee revenue and market capitalization. The greater the ability of a network to generate fee revenue, the greater the network’s ability to pass on value to the network in the form of token burn or staking rewards. This quarter, the Grayscale Research Top 20 features the following smart contract platforms: ETH, SOL, SUI, and OP.
Exhibit 4: All smart contract platforms compete for fee revenue
The Grayscale Research Top 20
Each quarter the Grayscale Research team analyzes hundreds of digital assets to inform the rebalancing process for the FTSE/Grayscale Crypto Sectors family of indexes. Following this process, Grayscale Research produces a Top 20 list of assets within the Crypto Sectors universe. The Top 20 represents a diversified set of assets across Crypto Sectors that, in our view, have high potential over the coming quarter (Exhibit 4). Our approach incorporates a range of factors, including network growth/adoption, upcoming catalysts, sustainability of fundamentals, token valuation, token supply inflation, and potential tail risks.
This quarter we are emphasizing tokens that touch on at least one of the three following central market themes: (1) the U.S. election and its potential implications for industry regulation, particularly in areas like decentralized finance (DeFi), and staking; (2) continued breakthroughs in decentralized AI technologies and the use of blockchains by AI agents; and (3) growth in the Solana ecosystem. Building on these themes, we are adding the following six assets to our Top 20 list for Q1 2025:
- Hyperliquid (HYPE): Hyperliquid is a Layer 1 blockchain designed to support on-chain financial applications. Its primary application is a decentralized exchange (DEX) for perpetual futures, featuring a fully on-chain order book.
- Ethena (ENA): Ethena protocol has developed as novel stablecoin, USDe, which is backed primarily by hedged positions in Bitcoin and Ether collateral.[5] Specifically, the protocol holds long positions in Bitcoin and Ether and short positions in perpetual futures contracts on the same assets. A staked version of the token offers from the difference between spot and futures prices.
- Virtuals Protocol (VIRTUAL): Virtuals Protocol is a platform for creating AI agents on Base, an Ethereum Layer 2 network. These AI agents are designed to perform tasks autonomously, mimicking human decision-making. The platform allows for the creation and co-ownership of tokenized AI agents, which can interact with their environment and other users.
- Jupiter (JUP): Jupiter is the premier DEX aggregator on Solana, boasting the highest TVL among all applications on the network. As retail traders increasingly enter the crypto market through Solana and speculation intensifies around Solana-based memecoins and AI agent tokens, we believe Jupiter is well positioned to capitalize on this growing market activity.
- Jito (JTO): Jito is a liquid taking protocol on Solana. Jito has experienced substantial growth in adoption over the past year and offers one of the best financial profiles in all of crypto, generating over $550mn in 2024 fee revenue.
- Grass (GRASS): Grass is a decentralized data network that rewards users for sharing their unused internet bandwidth through a Chrome extension. This bandwidth is used to scrape online data, which is then sold to AI companies and developers for training machine learning models, effectively conducting web scraping for data while compensating users.[6]
Exhibit 5: Updates to the Top 20 feature DeFi applications, AI agents, and the Solana ecosystem
Note: Shading denotes additions for the upcoming quarter, Q1 2025. *Asterisk denotes the appropriate sector for assets that did not make the Crypto Sectors index. Source: Artemis, Grayscale Investments. Data as of December 20, 2024. For illustrative purposes only. Assets subject to change. Grayscale, its affiliates, and clients may maintain positions in the digital assets discussed here. All the assets in our Top 20 list have high price volatility and should be considered high risk.
In addition to the new themes mentioned above, we continue to be excited about themes from previous quarters such as Ethereum scaling solutions, tokenization, and decentralized physical infrastructure (DePIN). Each of these themes is represented by the inclusion of protocols that return to the top 20, such as Optimism, Chainlink, and Helium, respectively.
This quarter we have rotated the following out of the Top 20: This quarter we have rotated the following out of the Top 20: TON, Near, Stacks, Maker (Sky), UMA Protocol, and Celo. Grayscale Research continues to see value in each of these projects, and they remain important elements of the crypto ecosystem. However, we believe the revised Top 20 list may offer more compelling risk-adjusted returns for the coming quarter.
Investing in the crypto asset class involves risks, some of which are unique to the crypto asset class, including smart contract vulnerabilities and regulatory uncertainty. Moreover, all the assets in our Top 20 have high volatility and should be considered high risk and are therefore not suitable for all investors. In light of the risks to the asset class, any investment in digital assets should therefore be considered in the context of a portfolio and with consideration of an investor’s financial goals.
Index Definition: The FTSE/Grayscale Crypto Sectors (CSMI) measures the price return of digital assets listed on major global exchanges.
[1] The Crypto Sectors Total Market Index was up 58% quarter to date through December 20th, 2024. Source: FTSE, Grayscale Investments.
[2] FTSE, Grayscale Investments, as of December 20, 2024.
[3] Source: FTSE Russell. Data as of December 20, 2024.
[4] As of December 20, 2024
[5] USDe collateral may also include other liquid stablecoins.
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