Original title: Grayscale Research Insights: Crypto Sectors in Q1 2025
Original author: Grayscale Research Team
Original source: https://www.grayscale.com/research/market-commentary/grayscale-research-insights-crypto-sectors-in-q1-2025
Compiled by: Tom, Mars Finance
The crypto market surged significantly in Q4 2024 [1], according to estimates from the FTSE/Grayscale crypto industry index series, reflecting the market's positive reaction to the results of the U.S. elections. Competition in the smart contract platform crypto industry remains fierce. As the leader in this category, Ethereum has underperformed compared to Solana, which ranks second in market capitalization [2], and investors' focus is gradually shifting to other Layer 1 networks such as Sui and The Open Network (TON), which is deeply integrated with the Telegram messaging platform.
We have updated Grayscale Research's Top 20 asset list. The Top 20 represents a diversified group of assets that we believe have high potential in various sectors of the crypto industry for the upcoming quarter. Newly added assets this quarter include HYPE, ENA, VIRTUAL, JUP, JTO, and GRASS. Please note that all assets in our Top 20 list exhibit high price volatility and should be considered high-risk assets.
The Grayscale Crypto Industry Framework provides a comprehensive method for understanding the landscape of investable digital assets and their underlying technological relationships. Based on this framework and in collaboration with FTSE Russell, we developed the FTSE/Grayscale crypto industry index series to measure and monitor the crypto asset class (see Chart 1). Grayscale Research applies this crypto industry index in our ongoing analysis of the digital asset market.
Chart 1: Our crypto industry index returns were positive in 2024
In Q4 2024, cryptocurrency valuations surged significantly, mainly benefiting from the market's positive feedback on the U.S. election results. According to our comprehensive crypto industry market index (CSMI), the total market capitalization of the entire industry grew from $1 trillion to $3 trillion in this quarter [3]. Chart 2 compares the total market capitalization of the crypto market with various asset classes in traditional public and private markets. For instance, the current market capitalization of the digital asset industry is roughly equivalent to that of the global inflation-linked bond market, about twice the size of the U.S. high-yield bond market, but still significantly lower than the total market capitalization of the global hedge fund industry or the Japanese stock market.
Chart 2: The cryptocurrency market capitalization increased by $1 trillion in Q4 2024
Due to rising valuations, many new tokens meet our inclusion criteria for the Grayscale Crypto Industry Framework (which requires a minimum market capitalization of $100 million for most assets). In this quarter's index series rebalancing, we added 63 new tokens, bringing the total to 283 tokens. The Consumer & Culture Crypto Sector saw the largest number of new tokens, reflecting the continued strong performance of meme coins, along with value increases for various assets related to gaming and social media. The most significant new asset by market capitalization in this crypto industry framework is Mantle, an Ethereum Layer 2 protocol that now meets our minimum liquidity requirements (see our index inclusion criteria for details).
Competition in smart contract platforms
The competition in the smart contract platform crypto industry may be the most intense sub-market in the entire digital asset industry. While 2024 is a milestone year for the leader in this field, Ethereum — which passed the approval for launching exchange-traded products (ETPs) in the U.S. and completed a major upgrade — its token Ether still underperformed compared to some competitors, including Solana, which ranks second in market capitalization in this category. Investors are also turning their attention to other Layer 1 networks, such as the high-performance Sui and The Open Network (TON), which is integrated with the Telegram messaging platform.
In the process of building infrastructure for application developers, the designers of smart contract blockchains need to balance multiple design trade-offs. These trade-offs will affect the three elements in the 'blockchain trilemma': network scalability, network security, and network decentralization. For instance, prioritizing scalability often means high transaction throughput and low fees (like Solana), while prioritizing decentralization and security may lead to lower transaction throughput and higher fees (like Ethereum). Specific design choices can lead to significant differences in block times, transaction throughput, and average transaction fees across platforms (see Chart 3).
Chart 3: Different smart contract platforms have different technical characteristics
Regardless of the design trade-offs of the platform and the strengths and weaknesses of the network, one way smart contract platforms empower themselves is through the ability to generate network fee revenue. As mentioned in our previous articles, fee revenue can be seen as the main driver of token value accumulation in this sub-market, although metrics like Total Value Locked (TVL) are also worth monitoring (refer to 'The Battle for Value of Smart Contract Platforms'). As shown in Chart 4, there is a statistical relationship between fee revenue of smart contract platforms and market capitalization. The stronger the network's ability to generate fee revenue, the more likely it is to return value to the network by destroying tokens or providing staking rewards to nodes. This quarter, the smart contract platforms in Grayscale Research's Top 20 list include ETH, SOL, SUI, and OP.
Chart 4: All smart contract platforms are competing for fee revenue
Grayscale Research Top 20
Each quarter, the Grayscale Research team analyzes hundreds of digital assets to support the rebalancing process of the FTSE/Grayscale crypto industry index series. Based on this process, Grayscale Research selects the Top 20 asset list within the crypto industry. The Top 20 covers a diversified group of assets that we believe have high potential in the next quarter (see Chart 5). Our research methodology considers multiple factors, including network growth/adoption, potential trigger timelines, sustainability of fundamentals, token valuation, token inflation, and potential tail risks.
This quarter, we focused on tokens that touch on at least one of the following three core market themes: (1) the U.S. elections and their potential impact on industry regulation, particularly in areas like decentralized finance (DeFi) and staking; (2) ongoing breakthroughs in decentralized AI technology and the use of AI agents on the blockchain; (3) the growth of the Solana ecosystem. Based on these themes, we included the following six assets in the Top 20 list for Q1 2025:
Hyperliquid (HYPE): Hyperliquid is a Layer 1 blockchain designed specifically to support on-chain financial applications. Its main application is a decentralized exchange (DEX) focused on perpetual contracts, featuring a fully on-chain order book.
Ethena (ENA): The Ethena protocol has launched a new type of stablecoin, USDe, primarily backed by long positions in BTC and ETH, along with hedging against short positions in perpetual contracts [5]. Specifically, the protocol holds long positions in Bitcoin and Ethereum while shorting perpetual contracts in similar assets. Staked token yields come from the difference between spot and futures prices.
Virtuals Protocol (VIRTUAL): Virtuals Protocol is a platform for creating AI agents on the Ethereum Layer 2 network Base. These AI agents aim to autonomously execute tasks and simulate human decision-making processes. 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, ranking high in TVL among all applications on that network. As retail traders increasingly enter the crypto market through Solana and speculation around meme coins and AI agent tokens on Solana intensifies, we believe Jupiter is poised to benefit in this increasingly active market.
Jito (JTO): Jito is a liquid staking protocol on Solana. Over the past year, Jito's adoption rate has significantly increased, and its financial performance ranks among the best in the crypto space, with fee revenue exceeding $550 million in 2024.
Grass (GRASS): Grass is a decentralized data network that rewards users for sharing their unused internet bandwidth through a Chrome extension. This bandwidth is used to scrape web data, which is then sold to AI companies and developers for training machine learning models, essentially scraping web data and compensating users for it [6].
Chart 5: Updates to the Top 20 this quarter cover DeFi applications, AI agents, and the Solana ecosystem
Note: Highlighted backgrounds indicate newly added assets in the new quarter (Q1 2025). Those marked with an asterisk (*) are not included in the corresponding tracks of the crypto industry index. Source: Artemis, Grayscale Investments. Data as of December 20, 2024. For illustration purposes only; assets may change. Grayscale, its affiliates, and clients may hold the digital assets discussed here. All assets in the Top 20 list exhibit high price volatility and should be considered high-risk assets.
In addition to the new themes mentioned above, we remain optimistic about other themes discussed in previous quarters, such as Ethereum scaling solutions, asset tokenization, and decentralized physical infrastructure (DePIN). To reflect these themes, we continue to retain protocols that are returning to the Top 20, such as Optimism, Chainlink, and Helium, corresponding to the aforementioned themes.
This quarter, we removed the following assets from the Top 20: TON, Near, Stacks, Maker (Sky), UMA Protocol, and Celo. Grayscale Research still recognizes the value of these projects and believes they remain significant in the crypto ecosystem. However, we believe the new Top 20 list may offer more attractive risk-adjusted returns in the upcoming quarter.
Investing in the crypto asset class carries certain risks, some of which are unique to this asset class, including smart contract vulnerabilities and regulatory uncertainties. In addition, all assets in the Top 20 list exhibit high volatility and should be considered high-risk assets, making them unsuitable for all investors. Given the risk considerations for this asset class, any investment in digital assets should be placed at the portfolio level and aligned with the investor's financial goals.
Index definition: The FTSE/Grayscale Crypto Industry Market Index (CSMI) measures the price returns of digital assets listed on major exchanges worldwide.
[1] As of December 20, 2024, the total market index for the crypto industry has increased by 58% this quarter. Source: FTSE, Grayscale Investments.
[2] FTSE, Grayscale Investments, as of December 20, 2024.
[3] Source: FTSE Russell, data as of December 20, 2024.
[4] As of December 20, 2024.
[5] USDe's collateral may also include other liquidity stablecoins.
[6] Bitget
