Summary:

The crypto market surged significantly in Q4 2024, with the FTSE/Grayscale Crypto Sectors index showing strong market performance. The increase largely reflects the market's positive reaction to the U.S. election results. Competition in the smart contract platform sector remains fierce. The sector leader Ethereum's price performance has lagged behind that of the second-largest competitor, Solana, and investors are increasingly focused on other Layer 1 networks like Sui and The Open Network (TON). Grayscale Research updated its Top 20 token list, representing a diversified set of assets within the cryptocurrency industry that may have high potential in the upcoming quarter. New assets for Q1 2025 include HYPE, ENA, VIRTUAL, JUP, JTO, and GRASS. All assets in the Top 20 exhibit 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 to the underlying technology. 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 (Chart 1). Grayscale Research incorporates this index into its analysis of the digital asset market.

Chart 1: Positive Returns of Grayscale Crypto Sectors Index in 2024

Cryptocurrency valuations soared in Q4 2024, primarily due to the market's positive reaction to the U.S. election results. According to the Cryptocurrency Sector Market Index (CSMI), the total market cap of the industry increased from $1 trillion to $3 trillion this quarter. The following Chart 2 compares the total market cap of cryptocurrencies to various traditional public and private market asset classes. For example, the current market cap of the digital asset industry is roughly equivalent to that of the global inflation-linked bond market—more than twice that of the U.S. high-yield bond market but still far below that of the global hedge fund industry or the Japanese stock market.

Chart 2: Cryptocurrency Market Cap Increased by $1 Trillion in Q4 2024

Due to increased valuations, many new tokens meet the inclusion criteria of the Grayscale Crypto Sectors framework (which sets a minimum market cap requirement of $100 million for most tokens). In this quarterly rebalancing, Grayscale has added 63 new assets to its index series, now totaling 283 tokens. The consumer and culture sectors saw the largest number of new tokens, reflecting the continued strong returns of meme coins and the appreciation of various assets related to gaming and social media.

By market cap, the largest new asset in the Crypto Sectors is Mantle, an Ethereum Layer 2 protocol, which has now met the minimum liquidity requirement.

Smart Contract Platform Competition

The smart contract platform sector may be the most competitive niche in the digital asset industry. While 2024 is a milestone year for the sector leader Ethereum—having received approval for U.S. spot exchange-traded products (ETPs) and undergoing significant upgrades—the performance of ETH has lagged behind some competitors like 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 blockchain TON integrated with the Telegram platform.

When creating infrastructure for application developers, architects of smart contract blockchains face various design choices. These design choices affect the three factors that constitute the 'Blockchain Trilemma': network scalability, network security, and network decentralization. For example, prioritizing scalability often results in high transaction throughput and low fees (e.g., Solana), while prioritizing decentralization and network security may lead to lower throughput and higher fees (e.g., Ethereum). These design choices lead to different block times, transaction throughput, and average transaction fees (Chart 3).

Chart 3: Smart Contract Platforms with Different Technical Characteristics

Regardless of design choices and the strengths and weaknesses of the network, smart contract platforms derive their value from the fee revenue they generate. While other metrics (such as total TVL) are also important, fee revenue can be seen as the primary driver of value accumulation for tokens in this market segment (Related reading: The Battle for Value in Smart Contract Platforms).

As shown in Chart 4, there is a statistical relationship between fee revenue and market cap for smart contract platforms. The stronger the network's ability to generate fee revenue, the greater its ability to pass value back to the network in the form of token burns or staking rewards. This quarter, the Top 20 token list compiled by Grayscale Research includes several smart contract platform tokens: ETH, SOL, SUI, and OP.

Chart 4: All Smart Contract Platforms Compete 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 index series. Following this process, Grayscale Research generates a list of the top 20 assets within the Crypto Sectors. The top 20 represents a diversified set of assets across Crypto Sectors, and these assets may have high potential in the upcoming quarter (Chart 4). The selection criteria combine 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 U.S. elections and their potential impact on industry regulation, particularly in areas like decentralized finance (DeFi) and staking; ongoing breakthroughs in decentralized AI technology and the use of AI agents in blockchain; and the 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 primary application is a decentralized exchange (DEX) for perpetual futures, featuring a fully on-chain order book. Ethena (ENA): The Ethena protocol has evolved into a new stablecoin, USDe, primarily collateralized by hedging positions in Bitcoin and Ethereum. Specifically, the protocol holds long positions in Bitcoin and Ether, as well as short positions in perpetual futures contracts for the same assets. The staked version of the token generates 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 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 on that 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 has seen significant adoption growth over the past year, boasting the best financial position 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. Chart 5: New Additions to the Top 20 Include DeFi Applications, AI Agents, and the Solana Ecosystem.

Note: The shading indicates new tokens for the upcoming quarter (Q1 2025). '*' indicates assets not included in the Crypto Sectors index. Source: Artemis, Grayscale Investments. Data as of December 20, 2024, for reference only. Assets are subject to 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 continue to be reflected through 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 an important part of the crypto ecosystem. However, the revised Top 20 list may offer more attractive venture capital returns in the upcoming quarter.

Investing in the cryptocurrency asset class involves risks, some of which are unique to the cryptocurrency asset class, including smart contract vulnerabilities and regulatory uncertainties. Furthermore, all assets in the Top 20 exhibit high volatility and should be considered high-risk and may not be suitable for all investors. Given the risks associated with the asset class, any investment in digital assets should be considered in the context of the overall investment portfolio and the investor's financial goals.