Original title: Grayscale Research Insights: Crypto Sectors in Q1 2025
Source: Grayscale Research
Compiled by: Golem, Odaily Planet Daily
Summary:
· The crypto market saw a significant increase in Q4 2024, with the FTSE / Grayscale Crypto Sectors Index showing strong market performance. The rise largely reflects the market's positive reaction to the U.S. election results.
· The competition in the smart contract platform space remains fierce. The leading platform, Ethereum, is lagging behind its market cap second competitor, Solana, and investors are increasingly focusing on other Layer 1 networks such as Sui and The Open Network (TON).
· Grayscale Research has updated the Top 20 token list. This list represents a diverse set of assets in the cryptocurrency industry that may have high potential in the upcoming quarter. Newly added assets for Q1 2025 include HYPE, ENA, VIRTUAL, JUP, JTO, and GRASS. All assets in the Top 20 list 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 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.
Figure 1: Positive Returns of the Grayscale Crypto Sectors Index in 2024
Cryptocurrency valuations surged in Q4 2024, primarily due to the market's positive reaction to the U.S. election results. According to the Cryptocurrency Market Index (CSMI), the total market cap of the industry increased from $1 trillion to $3 trillion this quarter. Figure 2 compares the total market cap of cryptocurrencies with 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 the global hedge fund industry or the Japanese stock market.
Figure 2: Q4 2024 Cryptocurrency Market Cap Increased by $1 Trillion
Due to valuation increases, many new tokens met the inclusion criteria of the Grayscale Crypto Sectors framework (which has a minimum market cap requirement of $100 million for most tokens). In this quarter's rebalancing, Grayscale added 63 new assets to its index series, which now includes a total of 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 cap, the largest new asset in Crypto Sectors is Mantle, an Ethereum Layer 2 protocol that has now met the minimum liquidity requirements (for more detailed information on Grayscale's index inclusion criteria, please refer here).
Competition in Smart Contract Platforms
The smart contract platform sector may be the most competitive sub-market in the digital asset industry. While 2024 was a landmark year for Ethereum, the leader in this space—receiving approval for U.S. exchange-traded products (ETP) and undergoing significant upgrades—ETH's performance has not kept pace with some competitors, such as Solana, which is the second-largest asset by market cap in this domain. Investors are also turning their attention to other L1 networks, including high-performance blockchains like Sui and the blockchain integrated with the Telegram platform, TON.
When creating infrastructure for application developers, architects of smart contract blockchains face a variety of design choices. These design choices affect the three factors that constitute the 'blockchain trilemma': network scalability, network security, and network decentralization. For instance, 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 (Figure 3).
Figure 3: Smart contract platforms have different technical characteristics.
Regardless of the design choices and the strengths and weaknesses of the network, smart contract platforms derive their value from the network fee revenue they generate. While other metrics such as total TVL are also important, fee revenue can be seen as the primary driver of token value accumulation in this market segment (see related reading: The Battle for Value in Smart Contract Platforms).
As shown in Figure 4, there is a statistical relationship between fee revenue and market cap for smart contract platforms. The stronger a network's capacity 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 includes several smart contract platform tokens: ETH, SOL, SUI, and OP.
Figure 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 index series. Following this process, Grayscale Research generates a list of the top 20 assets in 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 filtering criteria for this list combines a range of factors, including network growth/adoption, upcoming catalysts, fundamental sustainability, 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. election and its potential impact on industry regulation, particularly in areas such as decentralized finance (DeFi) and staking;
· Ongoing 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 have been added to the Top 20 list for Q1 2025:
1. 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.
2. 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 yields based on the differences between spot and futures prices.
3. 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.
4. Jupiter (JUP): Jupiter is the leading DEX aggregator on Solana, boasting the highest TVL in 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.
5. Jito (JTO): Jito is a liquidity protocol on Solana. Jito has seen a significant increase in adoption over the past year and boasts the best financial condition in the cryptocurrency sector, with fee revenue exceeding $550 million in 2024.
6. 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 newly added tokens for the upcoming quarter (Q1 2025). ‘*’ indicates assets in related fields that are not included in the Crypto Sectors Index. Source: Artemis, Grayscale Investments. Data as of December 20, 2024, for reference only. Assets may change. Grayscale and its affiliates and clients may hold positions in the digital assets discussed in this document. All Top 20 assets exhibit high price volatility and should be viewed as high-risk assets.
In addition to the new themes mentioned above, Grayscale remains optimistic about previous quarters' themes, such as Ethereum scaling solutions, tokenization, and decentralized physical infrastructure (DePIN). These themes are still reflected in 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 view these projects positively 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 uncertainty. Additionally, all assets in the Top 20 exhibit high volatility and should be viewed as high-risk, making them unsuitable for all investors. Given the risks of this asset class, any investment in digital assets should be considered in the context of the investor's portfolio and financial goals.
