Original author: Grayscale Fund
Compiled by: Lawrence, Mars Finance
Summarize:
Crypto markets surged in Q4 2024, with the FTSE/Grayscale Crypto Sectors Index showing strong market performance. The gains largely reflected the market’s positive reaction to the results of the U.S. election.
Competition in the smart contract platform space remains fierce. Ethereum, the leader in the space, has lagged behind the second-largest competitor by market cap, Solana, and investors are increasingly paying attention to other Layer 1 networks such as Sui and The Open Network (TON).
Grayscale Research has updated its Top 20 tokens list. The list represents diversified assets in the cryptocurrency industry that could have high potential in the coming quarter. Newly added assets in Q1 2025 include HYPE, ENA, VIRTUAL, JUP, JTO, and GRASS. All assets in the Top 20 list have high price volatility and should be considered high risk.
Grayscale Crypto Sectors Index
Grayscale Crypto Sectors provides a comprehensive framework for understanding the range of investable digital assets and their relationship with underlying technologies. Based on this framework, and in collaboration with FTSE Russell, Grayscale has developed the FTSE Grayscale Crypto Sectors Index Series to measure and monitor crypto assets (Figure 1). Grayscale Research incorporates this index into its analysis of the digital asset market.
Chart 1: Positive returns of the Grayscale Crypto Sectors Index for 2024
Cryptocurrency valuations soared in Q4 2024, mainly due to the market's positive reaction to the results of the US elections. According to the Cryptocurrency Industry Market Index (CSMI), the industry's total market capitalization increased from $1 trillion to $3 trillion this quarter. Figure 2 compares the total cryptocurrency market capitalization to various traditional public and private market asset classes. For example, the market capitalization of today's digital asset industry is roughly equivalent to the global inflation-linked bond market—more than twice that of the US high-yield bond market, but still far below the global hedge fund industry or the Japanese stock market.
Figure 2: Increase of $1 trillion in cryptocurrency market capitalization in Q4 2024
Due to the increase in valuations, many new tokens met Grayscale's inclusion criteria for the Crypto Sectors framework (which has a minimum market cap requirement of $100 million for most tokens). In this quarterly rebalance, Grayscale added 63 new assets to the index series, now totaling 283 tokens. The consumer and cultural sectors saw the most new tokens added, reflecting the continued strong returns of meme coins and the appreciation of various assets related to gaming and social media.
By market capitalization, the largest new asset in Crypto Sectors is Mantle, an Ethereum Layer 2 protocol that has now met the minimum liquidity requirements (for more details on Grayscale's index inclusion criteria, please see here).
Competition among smart contract platforms
The smart contract platform sector may be the most competitive segment within the digital asset industry. While 2024 is a milestone year for the sector leader Ethereum—having received approval for US exchange-traded products (ETPs) and undergoing significant upgrades—the performance of ETH has not matched that of some competitors, such as Solana, which is the second-largest asset by market cap in this sector. Investors are also turning their attention to other L1 networks, including high-performance blockchains like Sui and the TON blockchain integrated with the Telegram platform.
When creating infrastructure for application developers, architects of smart contract blockchains face various design choices. These design choices impact the three factors that make up the 'blockchain trilemma': network scalability, network security, and network decentralization. For instance, prioritizing scalability often manifests as high transaction throughput and low fees (such as Solana), while prioritizing decentralization and network security may lead to lower throughput and higher fees (such as Ethereum). These design choices result in different block times, transaction throughput, and average transaction fees (Figure 3).
Chart 3: Smart contract platforms with different technical characteristics
Regardless of design choices and the strengths and weaknesses of the networks, smart contract platforms derive their value from the network fee revenue they generate. Although other metrics (like total TVL) are also important, fee revenue can be viewed as the primary driver of token value accumulation in this market segment.
As shown in Figure 4, there is a statistical relationship between fee revenue and market capitalization for smart contract platforms. The stronger a network's ability to generate fee revenue, the greater its ability to pass value to the network in the form of token burns or staking rewards. This quarter, the Top 20 token list compiled by Grayscale Research included several smart contract platform tokens: ETH, SOL, SUI, and OP.
Chart 4: All smart contract platforms are competing for fee revenue
Grayscale Research Top 20 Token List
Each quarter, the Grayscale Research team analyzes hundreds of digital assets to inform the rebalancing process of the FTSE/Grayscale Crypto Sectors series of indices. After this process, Grayscale Research generates a list of the top 20 assets within the Crypto Sectors. The top 20 represent a diversified set of assets across Crypto Sectors, and these assets may have high potential in the upcoming quarter (Figure 4). The selection process combines a range of factors, including network growth/adoption, upcoming catalysts, sustainability of fundamentals, token valuation, token supply inflation, and potential tail risks.
In Q1 2025, Grayscale will focus on tokens that involve at least one of the following three core market themes:
The US elections and their potential impact on industry regulation, particularly in areas like decentralized finance (DeFi) and staking;
Continued breakthroughs in decentralized AI technology and the use of AI agents on the blockchain;
Growth of the Solana ecosystem.
Based on these themes, the following six assets were added to the Top 20 list for Q1 2025:
Hyperliquid (HYPE): Hyperliquid is an L1 blockchain designed to support on-chain financial applications. Its main application is a decentralized exchange (DEX) for perpetual futures, with a fully on-chain order book.
Ethena (ENA): The Ethena protocol has evolved into a new type of stablecoin, USDe, primarily backed by hedged positions in Bitcoin and Ethereum. Specifically, the protocol holds long positions in Bitcoin and Ether, as well as short positions in perpetual futures contracts of the same assets. The staked version of the token provides yield through the difference between spot and futures prices.
Virtual Protocol (VIRTUAL): Virtual Protocol is a platform for creating AI agents on the Ethereum L2 network Base. These AI agents are designed to mimic human decision-making and autonomously execute tasks. The platform allows for the creation and co-ownership of tokenized AI agents that can interact with their environment and other users.
Jupiter (JUP): Jupiter is the leading DEX aggregator on Solana, with the highest TVL in the network. As retail traders increasingly enter the cryptocurrency market through Solana, and speculation around Solana-based memecoins and AI agent tokens intensifies, we believe Jupiter is fully capable of capitalizing on this growing market.
Jito (JTO): Jito is a liquidity protocol on Solana. Jito's adoption has surged over the past year, and it has the best financial standing in the cryptocurrency space, with fee revenue exceeding $550 million in 2024.
Grass (GRASS): Grass is a decentralized data network that rewards users for sharing unused internet bandwidth through a Chrome extension. This bandwidth is used to scrape online data, which is then sold to AI companies and developers to train machine learning models, effectively conducting web data scraping while compensating users.
Figure 5: The Top 20 additions include DeFi applications, AI agents, and the Solana ecosystem
Note: The shadows indicate new tokens for the upcoming quarter (Q1 2025). Asterisks (*) denote relevant asset classes not included in the Crypto Sectors Index. Source: Artemis, Grayscale Investments. Data as of December 20, 2024, for reference only. Assets may change. Assets may change. Grayscale and its affiliates and clients may hold positions in the digital assets discussed in this article. All Top 20 assets exhibit high price volatility and should be considered high-risk assets.
In addition to the new themes mentioned above, Grayscale remains optimistic about themes from previous quarters, such as Ethereum scaling solutions, tokenization, and decentralized physical infrastructure (DePIN). These themes are still reflected by some protocols returning to the Top 20, such as Optimism, Chainlink, and Helium.
This quarter, we removed Celo from the Top 20. Grayscale Research continues to be optimistic about these projects and believes they remain important components of the crypto ecosystem. However, the revised Top 20 list may offer more attractive venture capital returns in the upcoming quarter.
Investing in cryptocurrency asset classes involves risks, some of which are unique to the cryptocurrency asset class, including smart contract vulnerabilities and regulatory uncertainties. Additionally, all assets in the Top 20 exhibit high volatility and should be considered high-risk, thus may not be suitable for all investors. Given the risks of the asset class, any investment in digital assets should be considered in the context of the investor's portfolio and financial goals.
