Original title: Grayscale Research Insights: Crypto Sectors in Q1 2025
Original source: Grayscale Research
Original translation: Golem, Odaily Planet Daily
Summary:
· The cryptocurrency market surged in Q4 2024, with the FTSE/Grayscale Crypto Sectors index showing strong market performance. The increase largely reflects the market's positive response to the outcome of the U.S. elections.
· Competition in the smart contract platform sector remains fierce. The sector leader Ethereum's price performance lags behind that of its second-largest competitor, Solana, as investors increasingly focus on other Layer 1 networks like Sui and The Open Network (TON).
· Grayscale Research has updated the Top 20 token list. This list represents a diverse array of assets in the cryptocurrency industry that may have high potential in the upcoming quarter. 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 to 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 for the Grayscale Crypto Sectors Index in 2024
Cryptocurrency valuations surged in Q4 2024, primarily due to the market's positive reaction to the outcome of the U.S. elections. According to the Cryptocurrency Sector Market Index (CSMI), the total industry market cap increased from $1 trillion to $3 trillion this quarter. Below, Figure 2 compares the total cryptocurrency market cap with various traditional public and private market asset classes. For instance, the current market cap of the digital asset industry is roughly equivalent to 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: Increase of $1 trillion in cryptocurrency market capitalization in Q4 2024
Due to valuation increases, many new tokens have met Grayscale's Crypto Sectors framework inclusion criteria (which has a minimum market cap requirement of $100 million for most tokens). In this quarterly rebalancing, Grayscale added 63 new assets to its index series, bringing the total to 283 tokens. The consumer and culture sectors saw the most 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 that has now met the minimum liquidity requirements (for more details on Grayscale index inclusion criteria, see here).
Competition among smart contract platforms
The smart contract platform sector may be the most competitive sub-market in the digital asset industry. While 2024 is a milestone year for the sector leader Ethereum—having gained approval for exchange-traded products (ETPs) in the U.S. and undergone significant upgrades—ETH's performance lags behind some competitors, such as Solana, which is the second largest asset in this sector by market cap. 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 make up the 'Blockchain Trilemma': network scalability, network security, and network decentralization. For example, 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 differing block times, transaction throughput, and average transaction fees (Figure 3).
Figure 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 network fee revenue they generate. While other metrics (like total TVL) are also important, fee revenue can be seen as the main 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 and market cap among smart contract platforms. The stronger a 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 from Grayscale Research included some smart contract platform tokens: ETH, SOL, SUI, and OP.
Figure 4: All smart contract platforms are vying 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 represent a diversified set of assets across Crypto Sectors, and these assets may have high potential in the upcoming quarter (Figure 4). The filtering for this list incorporates 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 such as 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 primary 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 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, holding 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.
5.Jito (JTO): Jito is a liquidity protocol on Solana. Jito's adoption has surged over the past year, boasting the best financial health 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 performing web data scraping while compensating users.
Figure 5: New additions to the Top 20 include DeFi applications, AI agents, and the Solana ecosystem
Note: The shadow indicates new tokens added in the upcoming quarter (Q1 2025). ‘*’ indicates related field 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 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 remains optimistic about these projects and believes they are still important components of the cryptocurrency ecosystem. However, the revised Top 20 list may offer more attractive venture capital returns in the next quarter.
Investing in cryptocurrency asset classes involves risks, some of which are unique to cryptocurrency asset classes, 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.
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