Grayscale: Cryptocurrency Industry Trends and Potential Tokens in Q4 2024
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Author: Grayscale Research team; Compiled by 0xjs@Jinse Finance
Key Points:
- According to the FTSE/Grayscale Crypto Sectors series indices, the cryptocurrency market consolidated sideways in Q3 2024.
- The changes in the FTSE/Grayscale series indices this year have highlighted new themes in the digital asset industry, including the rise of decentralized AI platforms, efforts to tokenize traditional assets, and the popularity of memecoins.
- Although Ethereum has underperformed Bit this year to date, it has outperformed the Smart Contract Platform Crypto sector index. Grayscale Research believes that Ethereum should maintain its advantages in the smart contract space for several reasons.
- We have updated the Grayscale Research Top 20 tokens. The top 20 tokens represent the diversified assets in the cryptocurrency space that we believe have high potential in the next quarter. The new assets for Q4 include SUI, TAO, OP, HNT, CELO, and UMA.
- All the assets in our top 20 leaderboard have high price volatility and should be considered high-risk; the US election could also be a major risk event for the crypto market.
The Grayscale Crypto Sectors provides a comprehensive framework for understanding the investable universe of digital assets and their relationship to underlying technologies. Based on this framework and in collaboration with FTSE Russell, we have developed the FTSE Grayscale Crypto Sectors index series to measure and monitor crypto asset categories (Figure 1). Grayscale Research has incorporated the Crypto Sectors indices into its ongoing analysis of the digital asset market.
Figure 1: Crypto sector indices measure the performance of these asset categories
The crypto industry framework is designed to be updated as the evolving digital asset market dynamics, with a quarterly rebalancing process. The latest quarterly rebalancing process was completed on September 20th. The rebalancing process since the beginning of this year has resulted in significant changes to the index composition, reflecting new exchange listings, changes in asset liquidity, and market performance. This year's updates to the crypto industry indices have highlighted new emerging themes in the digital asset industry, including the rise of decentralized AI platforms (e.g., TAO), efforts to tokenize traditional assets (e.g., ONDO, OM, and GFI), and the popularity of memecoins (e.g., PEPE, WIF, FLOKI, and BONK).
From a returns perspective, Bit and the Currencies Crypto sector have outperformed other sub-sectors in 2024 (Figure 2), which may reflect the successful launch of spot Bit exchange-traded products (ETPs) in the US market and the favorable macroeconomic backdrop for this asset (for more details, please refer to our previous quarterly report "Grayscale Research Insights: Crypto Sector in Q3 2024").
Figure 2: Bit has outperformed this year, while Ethereum has performed well
As of September 25th, Ethereum's year-to-date gain was 13%, lower than Bit, but it has outperformed most other crypto assets. For example, our Crypto Sector Market Index (CSMI) (which measures the returns of the entire asset class) is down about 1% this year. In fact, excluding Ethereum, the Smart Contract Platform Crypto sector index is down about 11%, so it has clearly outperformed its sub-sector. Among all the assets in our crypto industry framework, Ethereum's year-to-date return is around the 70-75th percentile. Therefore, while Ethereum's appreciation has been lower than Bit, its performance this year has still been solid compared to the crypto industry and the broader CSMI.
Smart Contract Platform Focus
Unlike the dominant currency crypto asset Bit, Ethereum faces fierce competition in the Smart Contract Platform crypto sector. This year, many smart contract alternative platforms have gained attention, including Solana, Toncoin, TRON, and Near, as well as new entrants to the crypto space like Sui. These assets are all vying for fee revenue, and some of the smart contract alternative platforms' compelling user experiences may lead to a decline in Ethereum's Layer 1 fee market share.
At the same time, Ethereum has several comparative advantages that support its position in the Smart Contract Platform crypto sector (Figure 3). Most importantly, it remains the leader in this category, with the most applications, the most developers, the highest 30-day fee revenue, and the largest value locked in smart contracts. When including its largest Ethereum Layer 2 networks, its daily active users are second only to Solana.
Figure 3: Ethereum is the leader in Smart Contract Platform fee revenue
As public chain technology continues to be adopted, Grayscale Research expects the entire Smart Contract Platform crypto sector to see growth (in terms of users, transactions, and fees), which may benefit all assets in this category to some degree. Given Ethereum's leadership in this category, it is hard to imagine a period of sustained growth in the Smart Contract Platform space not benefiting Ethereum, in part due to Ethereum's existing network effects. Therefore, while Ethereum faces fierce competition, we believe Ethereum remains a compelling asset in the Smart Contract Platform crypto space.
Additionally, Ethereum benefits from certain specific features that may temporarily prevent its competitors. These features include high network reliability (limited downtime), high economic security, high decentralization, and a more defined regulatory status in the US. There are also encouraging adoption trends emerging in the Ethereum ecosystem, including tokenization, prediction markets, and builds by large companies like Sony. For all these reasons, Grayscale Research continues to view Ethereum as a very compelling investment theme.
Grayscale Research Top 20 Tokens
Each quarter, the Grayscale Research team analyzes hundreds of digital assets to inform the rebalancing process for the FTSE/Grayscale Crypto Sector index series. Following this process, Grayscale Research publishes a list of the top 20 assets in the crypto industry. The top 20 assets represent the diversified assets in the crypto industry that we believe have high potential in the next quarter (Figure 4). Our approach combines a range of factors, including network growth/adoption, upcoming catalysts, the sustainability of fundamentals, token valuations, token supply inflation, and potential tail risks.
For Q4, we are adding 6 new assets to the Top 20 tokens:
1. Sui: A high-performance Layer 1 smart contract blockchain enabling innovative applications.
2. Bittensor: A platform that fosters the development of open and global AI systems.
3. Optimism: An Ethereum scaling project based on Optimistic Rollups (a scaling solution).
4. Helium: A decentralized wireless network running on Solana, a leader in the Decentralized Physical Infrastructure (DePin) category.
5. Celo: A mobile-first blockchain project transitioning to an Ethereum Layer 2 network, focused on stablecoins and payments.
6. UMA Protocol: An optimistic oracle network that provides services to leading blockchain-based prediction market Polymarket (and other protocols).
Figure 4: High-potential crypto assets in Q4 2024
The newly added assets reflect several crypto market themes that Grayscale Research is focused on.
Sui and Optimism can both be seen as examples of high-performance infrastructure.
Sui is a third-generation blockchain developed by a former Meta engineering team. Two months ago, Sui underwent a network upgrade that increased transaction speeds by 80%, surpassing Solana; this has led to a recent uptick in the network's adoption.
Optimism is an Ethereum Layer 2 that is helping to scale the Ethereum network and has developed a framework for building scaling solutions, called "Superchains," which Coinbase's Layer 2 BASE and Sam Altman's Worldcoin Layer 2 are both built on.
Celo and UMA both benefit from unique adoption trends: the use of stablecoins and prediction markets.
Celo is a blockchain focused on developing-world stablecoins and payments, gaining significant traction in Africa, primarily led by the MiniPay app of the Opera browser. Celo recently surpassed TRON to become the blockchain with the largest daily active stablecoin usage, and is now migrating from an independent blockchain to an Ethereum Layer 2 within the Optimism Superchains framework.
UMA is the oracle network used by the breakthrough crypto election year application Polymarket. UMA on-chain records the resolution of each Polymarket event contract and facilitates voting on Polymarket results disputes, ensuring solutions are free from centralization, arbitrariness, or bias.
The addition of Helium reflects our preference for category leaders and projects with sustainable revenue. Helium is the leader in the DePIN (Decentralized Physical Infrastructure Network) category, efficiently allocating wireless network coverage and connectivity resources using a decentralized model and rewarding participants who maintain network infrastructure. Helium has scaled to over 1 million hotspots and 100,000 mobile users, generating over $2 million in network fee revenue year-to-date.
Finally, while we have been focused on decentralized AI themes for some time, Bittensor has only now entered our crypto framework due to improvements in market structure (particularly more available pricing sources and higher liquidity). Bittensor has emerged as a standout participant in the intersection of Crypto and AI, attempting to create a global decentralized platform for AI innovation through economic incentives.
This quarter, we have replaced the following projects from the top 20: Render, Mantle, THORChain, Pendle, Illuvium, and Raydium. Grayscale Research continues to see value in these projects, and they remain important components of the crypto ecosystem. However, we believe the revised top 20 list may offer more attractive risk-adjusted returns for the next quarter.
Investing in crypto asset classes involves risks, some of which are unique to the crypto asset class, including smart contract vulnerabilities and regulatory uncertainty. Additionally, all assets in our top 20 have high volatility and should be considered high-risk and not suitable for all investors.
Finally, broader macroeconomic and financial market developments may impact crypto asset valuations, and the US elections in November should be viewed as a significant risk event for crypto markets. Former President Trump has clearly embraced the digital asset industry, while Vice President Harris recently stated that her administration "will encourage innovations like artificial intelligence and digital assets while protecting our consumers and investors."
Given the risks of this asset class, any investment in digital assets should be considered in the context of an investor's portfolio and financial objectives.
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Disclaimer: The content above is only the author's opinion which does not represent any position of Followin, and is not intended as, and shall not be understood or construed as, investment advice from Followin.
