- Crypto markets moved sideways in Q3 2024, as measured by the FTSE/Grayscale Crypto Sectors family of indexes.
- Changes to the FTSE/Grayscale family of indexes this year highlight emergent themes for the digital assets industry, including the rise of decentralized artificial intelligence (AI) platforms, efforts to tokenize traditional assets, and the popularity of memecoins.
- Although Ethereum has underperformed Bitcoin year to date, it has outperformed the Smart Contract Platforms Crypto Sectors index. Grayscale Research sees several reasons why Ethereum should hold its own despite stiff competition in the smart contracts segment.
- 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 SUI, TAO, OP, HNT, CELO, and UMA.
- All of the assets in our Top 20 list have high price volatility and should be considered high risk; the U.S. election may also be a significant risk event for crypto markets.
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: Crypto Sectors indexes measure performance for the asset class
The Crypto Sectors framework is designed to update dynamically with the evolving digital assets marketplace and rebalances around the end of each quarter.[1] The latest quarterly rebalancing process concluded on September 20. Since the start of this year, the index rebalancing process has resulted in meaningful changes to index composition, reflecting new exchange listings, changes in asset liquidity, and market performance. Updates to the Crypto Sectors indexes this year highlight emergent themes for the digital asset industry, including the rise of decentralized AI platforms (e.g., TAO), efforts to tokenize traditional assets (e.g., ONDO, OM, and GFI), and the popularity of memecoins (e.g., PEPE, WIF, FLOKI, and BONK).
From a returns standpoint, Bitcoin and the Currencies Crypto Sector have surpassed other market segments in 2024 (Exhibit 2), possibly reflecting the successful launch of spot Bitcoin exchange-traded products (ETPs) in the U.S. market and a favorable macro backdrop for the asset (for more detail, see our prior quarterly report, Grayscale Research Insights: Crypto Sectors in Q3 2024).
Exhibit 2: Bitcoin outperformed this year, but Ethereum held its own
Ethereum has underperformed Bitcoin this year with a gain of 13% but has outperformed most other crypto assets. For example, our Crypto Sectors Market Index (CSMI) — which measures returns for the asset class as a whole — is down about 1% on the year. In fact, excluding Ethereum, the Smart Contract Platforms Crypto Sector Index is down about 11%, so it has meaningfully outperformed its market segment. Across all assets within our Crypto Sectors framework, Ethereum’s year-to-date return falls around the 70-75th percentile.[2] Therefore, despite appreciating less than Bitcoin, Ethereum is holding its own this year compared to its Crypto Sector and the broader CSMI.
Smart Contract Platforms in Focus
Unlike Bitcoin, which dominates the Currencies Crypto Sector, Ethereum faces meaningful competition within the Smart Contract Platforms Crypto Sector. A number of alternative smart contract platforms have gained traction this year, including Solana, Toncoin, Tron, and Near[3], as well as new additions to Crypto Sectors like Sui. These assets all compete for fee revenue, and the compelling user experience offered by some alternative smart contract platforms may have resulted in a decline in fee market share for the Ethereum Layer 1.
At the same time, Ethereum has a variety of comparative advantages that support its position within the Smart Contract Platforms Crypto Sector (Exhibit 3). Most importantly, it remains the category leader, with the most applications, the most developers, the highest 30d fee revenue, and the most value locked in smart contracts.[4] It has the second-highest second-highest number of daily active users after Solana when including the largest Ethereum Layer 2 networks.[5]
Exhibit 3: Ethereum is the category leader by fee revenue for smart contract platforms
As adoption of public blockchain technology continues, Grayscale Research expects the entire Smart Contract Platforms Crypto Sector to grow — in terms of users, transactions, and fees — which could benefit all the assets in the category to some degree. Because it is the category leader, it is difficult to imagine a period of sustained growth in the smart contract platform segment that does not benefit Ethereum, partly due to its existing network effects. For this reason, even though it faces meaningful competition, in our view Ethereum remains a compelling asset within the Smart Contract Platforms Crypto Sector.
Moreover, Ethereum benefits from certain specific features which may stave off its competitors for a time. These include high network reliability (limited outages), high economic security, high decentralization, and clearer regulatory status in the United States. There have also been encouraging adoption trends within the Ethereum ecosystem, including tokenization, prediction markets, and building by large companies like Sony.[6] For all of these reasons, Grayscale Research continues to see a very compelling investment thesis for Ethereum.
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 incorporating six new assets into the Top 20:
- Sui: A high-performance Layer 1 smart contract blockchain offering innovative applications (for more details, see Building Block: Sui).
- Bittensor: A platform facilitating the development of open and global AI systems (for more details, see Building Block: Bittensor).
- Optimism: An Ethereum scaling project based on optimistic rollups (a type of scaling solution).
- Helium: A decentralized wireless network running on Solana and leader in the decentralized physical infrastructure (DePin) category.[7]
- Celo: A mobile-first blockchain project transitioning to an Ethereum Layer 2 network, with a focus on stablecoins and payments.
- UMA Protocol: An optimistic oracle network providing services to Polymarket, a leading blockchain-based prediction market (as well as other protocols).
Exhibit 4: High-potential Crypto Sectors assets for Q4 2024
The new inclusions reflect several crypto market themes that Grayscale Research is focused on. Both Sui and Optimism can be considered examples of high-performance infrastructure. Sui is a third-generation blockchain developed by a team of former Meta engineers. Two months ago, Sui underwent a network upgrade that improved its transaction speed by 80%, surpassing that of Solana; this has led to recent increased adoption on the network.[8] Optimism, an Ethereum Layer 2, is helping scale the Ethereum network and developed a framework for building scaling solutions called the “Superchain” that is used by Coinbase’s Layer 2 BASE and a Layer 2 built by Sam Altman’s Worldcoin.
Celo and UMA both benefit from unique adoption trends: stablecoin use and prediction markets. Celo is a blockchain focused on stablecoins and payments in developing countries and has gained traction in Africa led by the Opera Browser’s MiniPay app. Celo recently passed Tron as the top blockchain for stablecoin usage by daily addresses and is currently amid its migration from a standalone blockchain to an Ethereum Layer 2 in Optimism’s Superchain framework.[9] UMA is an oracle network used by Polymarket, crypto’s election-year breakout application. UMA records the resolution of each Polymarket event contract outcome on-chain and facilitates votes on Polymarket outcome disputes, ensuring a resolution without centralized, arbitrary, or biased interference.
The addition of Helium reflects our preference for category leaders and projects with sustainable revenues. Helium is a leader in the DePIN (decentralized physical infrastructure network) category, leveraging a decentralized model to efficiently allocate resources for wireless network coverage and connectivity and rewarding participants for maintaining the network’s infrastructure. Helium has expanded to over 1 million total hotspots and 100,000 mobile subscribers, producing over $2 million in network fee revenue year to date.[10]
Lastly, although we have been focused on the decentralized AI theme for some time, Bittensor has only now made it into our Crypto Sectors framework, thanks to an improvement in market structure — specifically more available pricing sources and higher liquidity. Bittensor has emerged as a prominent player in the crypto and AI intersection, capturing mindshare as it attempts to leverage economic incentives to create a global decentralized platform for AI innovation.
This quarter we have rotated the following out of the Top 20: Render, Mantle, ThorChain, Pendle, Illuvium, and Raydium. 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 of the assets in our Top 20 have high volatility and should be considered high risk and will not be suitable for all investors. Lastly, broader macroeconomic and financial market developments can affect crypto asset valuations, and the U.S. election in November should be considered a significant risk event for crypto markets. Former President Trump has clearly embraced the digital assets industry, while Vice President Harris said recently that her administration “will encourage innovative technologies like AI and digital assets, while protecting our consumers and investors."[11] 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.
[1] The family of indexes include assets listed on a minimum number of qualified exchanges, and meeting minimum market capitalization and liquidity requirements. They exclude stablecoins and wrapped assets. For more information see the index factsheets.
[2] Depending on whether the returns are adjusted for price volatility or not. Source: Artemis, Grayscale Investments. Data as of September 25, 2024. Past performance not indicative of future results.
[3] List based on year-to-date volatility-adjusted returns and ranked by market capitalization. Source: Artemis, Grayscale Investments. Data as of September 25, 2024. Past performance not indicative of future results.
[4] Source: Dapp Radar, Electric Capital, Artemis, DeFi Llama. Data as of September 25, 2024.
[5] Sum of Ethereum mainnet, Arbitrum, Optimism, Polygon, zkSync, Metis, Base, Blast, Mantle, Scroll, and Linea. Source: Artemis, Grayscale Investments. Data as of September 25, 2024. For illustrative purposes only.
[6] Sony is building an Ethereum Layer 2 blockchain known as Soneium, which could have applications related to music rights, gaming, and other industries. Source: Sony, Rareform Audio.
[7] Source: Be In Crypto.
[8] Sui and Coinmarketcap
[10] Helium, Dune analytics, and Artemis. Data as of 9/25/24
Important Information
Investments in digital assets are speculative investments that involve high degrees of risk, including a partial or total loss of invested funds. Investments in digital assets are not suitable for any investor that cannot afford loss of the entire investment. All content is original and has been researched and produced by Grayscale Investments, LLC (“Grayscale”) unless otherwise stated herein. No part of this content may be reproduced in any form, or referred to in any other publication, without the express consent of Grayscale. This information should not be relied upon as research, investment advice, or a recommendation regarding any products, strategies, or any investment in particular. This material is strictly for illustrative, educational, or informational purposes and is subject to change. This content does not constitute an offer to sell or the solicitation of an offer to sell or buy any security in any jurisdiction where such an offer or solicitation would be illegal. There is not enough information contained in this content to make an investment decision and any information contained herein should not be used as a basis for this purpose. This content does not constitute a recommendation or take into account the particular investment objectives, financial situations, or needs of investors. Investors are not to construe this content as legal, tax or investment advice, and should consult their own advisors concerning an investment in digital assets. The price and value of assets referred to in this content and the income from them may fluctuate. Past performance is not indicative of the future performance of any assets referred to herein. Fluctuations in exchange rates could have adverse effects on the value or price of, or income derived from, certain investments. Certain of the statements contained herein may be statements of future expectations and other forward-looking statements that are based on Grayscale’s views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance, or events to differ materially from those expressed or implied in such statements. In addition to statements that are forward-looking by reason of context, the words “may, will, should, could, can, expects, plans, intends, anticipates, believes, estimates, predicts, potential, projected, or continue” and similar expressions identify forward-looking statements. Grayscale assumes no obligation to update any forward-looking statements contained herein and you should not place undue reliance on such statements, which speak only as of the date hereof. Although Grayscale has taken reasonable care to ensure that the information contained herein is accurate, no representation or warranty (including liability towards third parties), expressed or implied, is made by Grayscale as to its accuracy, reliability, or completeness. You should not make any investment decisions based on these estimates and forward-looking statements. There is no guarantee that the market conditions during the past period will be present in the future. Rather, it is most likely that the future market conditions will differ significantly from those of this past period, which could have a materially adverse impact on future returns. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN. PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS. We selected the timeframe for our analysis because we believe it broadly constitutes the most complete historical dataset for the digital assets that we have chosen to analyze.
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