Original title: Grayscale Research Insights: Crypto Sectors in Q1 2025
Source: Grayscale Research
Compiled by: Golem, Odaily Planet Daily
Summary:
· The cryptocurrency market surged significantly in Q4 2024, with the FTSE/Grayscale Crypto Sectors index showing strong market performance. The rise largely reflects market optimism regarding the outcome of the U.S. elections.
· Competition in the smart contract platform space remains fierce. The leading platform, Ethereum, has underperformed compared to its second-largest competitor, Solana, and investors are increasingly paying attention to 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 coming quarter. The new assets added in 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 with underlying technologies. Based on this framework and in collaboration with FTSE Russell, Grayscale 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 soared in Q4 2024, primarily due to the market's positive reaction to the U.S. election results. According to the Cryptocurrency Industry 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 the market cap of the global inflation-linked bonds 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: Cryptocurrency market capitalization increased by $1 trillion in Q4 2024
Due to increased valuations, many new tokens have 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 quarterly rebalance, Grayscale added 63 new assets to the index series, now totaling 283 tokens. The consumer and culture 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 the Crypto Sectors is Mantle, an Ethereum Layer 2 protocol that now meets the minimum liquidity requirements (for more details on Grayscale's index inclusion criteria, see here).
Competition in Smart Contract Platforms
The smart contract platform space may be the most competitive segment in the digital asset industry. While 2024 is a milestone year for the sector leader, Ethereum—having received approval for U.S. exchange-traded products (ETP) and undergone significant upgrades—its performance has lagged behind certain competitors like Solana, which is the second-largest asset in the sector by market cap. 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 various design choices. These design choices impact the three factors that make up the 'impossible triangle of blockchain': network scalability, network security, and network decentralization. For example, prioritizing scalability often manifests as 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 result in different block times, transaction throughput, and average transaction fees (Figure 3).
Figure 3: Smart contract platforms exhibit 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 (like total TVL) are also important, fee revenue can be seen as the primary driver of token value accumulation in this market segment (Related reading: The Battle for Value in Smart Contract Platforms).
As shown in Figure 4, there is a statistical relationship between fee revenue from smart contract platforms and market capitalization. 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 burn or staking rewards. This quarter, the Top 20 token list provided by Grayscale Research includes several tokens from smart contract platforms: ETH, SOL, SUI, and OP.
Figure 4: All smart contract platforms are competing for fee revenue
Grayscale Research Top 20 Token List
Every quarter, the Grayscale Research team analyzes hundreds of digital assets to inform the rebalancing process of the FTSE/Grayscale Crypto Sectors index series. 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 coming quarter (Figure 4). The filtering of this list 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 U.S. elections and their potential impact on industry regulation, particularly in areas like decentralized finance (DeFi) and staking;
· Continuous breakthroughs in decentralized AI technology and the use of AI agents in blockchain;
· Growth of the Solana ecosystem.
Based on these themes, the following six assets were 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 for the same assets. The staked version of the token provides yield through the difference 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 the network. As more retail traders enter the cryptocurrency market through Solana, and speculation surrounding 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's adoption rate has significantly increased in the past year, with the best financial status in the cryptocurrency sector, generating 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: Shadows indicate new tokens added in the upcoming quarter (Q1 2025). '*' indicates assets in related sectors not included in the Crypto Sectors index. Data 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 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 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 be optimistic about these projects and considers them important components of the crypto ecosystem. However, the revised Top 20 list may provide more attractive risk-return profiles in the coming 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. Additionally, all assets in the Top 20 carry high volatility and should be considered high risk, thus not 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.
