Grayscale: Insights from the Crypto Industry Q4, Adding 6 Potential Assets

Author: Grayscale Research

Compiled by: Felix, PANews

Key Points

• According to the FTSE/Grayscale Cryptocurrency Industry Index, the crypto market consolidated in the third quarter of 2024.
• Changes in the FTSE/Grayscale index series highlight emerging themes in the digital asset industry, including the rise of decentralized AI platforms, efforts to tokenize traditional assets, and the popularity of meme coins.
• Although Ethereum's performance has lagged behind Bitcoin so far this year, it has outperformed the smart contract platform index. Grayscale Research believes that despite fierce competition in the smart contract platform space, there are several reasons Ethereum can maintain its position.
• The top 20 tokens compiled by Grayscale Research have been updated. The top 20 represent a diversified asset portfolio in the crypto industry, with high potential for the upcoming quarter. New assets this quarter include SUI, TAO, OP, HNT, CELO, and UMA.
• All listed top 20 assets exhibit high price volatility and should be considered high-risk; the U.S. elections may also pose a significant risk event for the crypto market.

The Grayscale Crypto Sectors provide 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, the FTSE/Grayscale Cryptocurrency Industry Index series was developed to measure and monitor the performance of cryptocurrency asset classes (Chart 1).

Chart 1: Cryptocurrency Industry Index Measuring Asset Class Performance

The crypto framework is designed to be updated in line with evolving market dynamics and adjusted at the end of each quarter. The latest adjustment process concluded on September 20. Since the beginning of this year, the index adjustment process has reflected new listings, changes in asset liquidity, and market performance. This year's updates to the cryptocurrency industry index have highlighted emerging themes in the digital asset industry, including the rise of decentralized AI platforms (like TAO), efforts to tokenize traditional assets (such as ONDO, OM, and GFI), and the popularity of Memecoins (like PEPE, WIF, FLOKI, and BONK).

From a returns perspective, Bitcoin has outperformed other segments in 2024 (Chart 2), which may reflect the successful launch of spot Bitcoin exchange-traded products (ETPs) in the U.S. market, along with a favorable macro backdrop for the asset.

Chart 2: Bitcoin Performs Well This Year, but Ethereum Also Holds Strong

Ethereum's performance has lagged behind Bitcoin this year, with a gain of 13%, but it has outperformed most other crypto assets. For example, the Cryptocurrency Sector Market Index (CSMI, which measures the returns of the entire asset class) has declined by about 1% this year. In fact, excluding Ethereum, the smart contract platform cryptocurrency industry index has dropped by about 11%, indicating that Ethereum has performed significantly better than its segment. Among all assets within the crypto framework, Ethereum's year-to-date return is approximately 70-75%. Therefore, while Ethereum's appreciation has been lower than Bitcoin's, its performance this year remains strong compared to the broader crypto industry and the CSMI.

Focus on Smart Contract Platforms

Unlike Bitcoin, which dominates the crypto space, Ethereum faces fierce competition in the smart contract platform arena. This year, many altcoin smart contract platforms have gained attention, including Solana, Toncoin, Tron, and Near, as well as new platforms like Sui. These assets are all vying for fee revenue, and the "smooth" user experiences offered by some smart contract platforms may lead to a decline in Ethereum L1's fee market share.

At the same time, Ethereum possesses various comparative advantages to support its dominance (Chart 3). Most importantly, Ethereum remains the leader with the most applications, the most developers, the highest 30-day fee revenue, and the most locked value. When including the largest Ethereum L2 networks, Ethereum has the second-highest daily active users, just behind Solana.

Chart 3: Ethereum is the Leader in Smart Contract Platform Fee Revenue

As public blockchain technology continues to be adopted, the entire smart contract platform category is expected to grow in users, transactions, and fees. This may benefit all assets within the category to some extent. As the leader in this category, Ethereum will benefit from its existing network effects as smart contract platforms continue to grow. For this reason, even in the face of fierce competition, Ethereum remains a highly attractive asset in the crypto space.

Additionally, Ethereum benefits from certain specific characteristics that may keep it temporarily ahead of its competitors. These characteristics include high network reliability, high economic security, a high degree of decentralization, and a clearer regulatory stance in the U.S. Encouraging adoption trends have also emerged within the Ethereum ecosystem, including tokenization, prediction markets, and initiatives from major companies like Sony. For all these reasons, Grayscale Research continues to view Ethereum as a very attractive investment theme.

Top 20 Assets

The top 20 assets compiled by Grayscale Research represent a diverse range of assets in the crypto industry, with high potential for the upcoming quarter (Chart 4). The ranking methodology considers a range of factors, including network growth/adoption, upcoming catalysts, sustainability of fundamentals, token valuation, token supply inflation, and potential tail risks.

The fourth quarter will include 6 new assets:

Sui: A high-performance L1 smart contract blockchain offering innovative applications.

Bittensor: A platform facilitating the development of open and global AI systems.

Optimism: An Ethereum scaling project based on Optimistic Rollups.

Helium: A decentralized wireless network running on Solana, a leader in the decentralized physical infrastructure (DePin) category.

Celo: A blockchain project designed for mobile devices, transitioning to an Ethereum L2 network, focusing on stablecoins and payments.

UMA Protocol: An optimistic oracle network serving leading blockchain-based prediction market Polymarket (and other protocols).

Chart 4: High-Potential Assets in the Cryptocurrency Industry for Q4 2024

The newly included blockchains reflect several crypto themes that Grayscale Research is focusing on. Sui and Optimism can both be seen as examples of high-performance infrastructure. Sui is a third-generation blockchain developed by a team of former Meta engineers. Two months ago, Sui underwent a network upgrade, increasing transaction speeds by 80%, surpassing Solana, which has seen a recent uptick in adoption. Optimism is an Ethereum L2 that is helping to scale the Ethereum network and has developed a framework for building scaling solutions called the "Superchain." Coinbase's L2 network Base and Sam Altman's Worldcoin-built L2 are both utilizing this framework.

Celo and UMA both benefit from unique adoption trends: the use of stablecoins and prediction markets. Celo is a blockchain focused on stablecoins and payments in developing countries, gaining attention in Africa through the MiniPay application in the Opera browser. Celo recently surpassed Tron to become the blockchain with the highest daily active addresses using stablecoins. It is currently migrating from an independent blockchain to an Ethereum L2 within the Optimism Superchain framework. UMA is the oracle network used by Polymarket, a breakthrough application in the crypto election year. UMA records the resolution of each Polymarket event contract on-chain and facilitates voting on disputes regarding Polymarket outcomes, ensuring that resolutions are free from centralized, arbitrary, or biased interference.

Helium is the leader in the DePIN (Decentralized Physical Infrastructure Network) category, efficiently allocating wireless network coverage and connectivity resources using a decentralized model, rewarding participants who maintain network infrastructure. Helium has expanded to over 1 million hotspots and 100,000 mobile users, with network fee revenue exceeding $2 million so far this year.

Despite focusing on decentralized AI themes for some time, Bittensor has only now been incorporated into the crypto industry framework due to improvements in market structure (particularly more available pricing sources and higher liquidity). Bittensor has become a player in both the crypto and AI fields, aiming to create a global decentralized platform for AI using economic incentives, thereby capturing market dominance.

Grayscale Research has rotated the following projects out of the top 20 this quarter: Render, Mantle, ThorChain, Pendle, Illuvium, and Raydium.

Investing in crypto assets involves risks, some of which are unique to crypto assets, including smart contract vulnerabilities and regulatory uncertainties. Furthermore, all assets in the top 20 exhibit high volatility and should be considered high-risk, not suitable for all investors. Finally, broader macroeconomic and financial market developments may affect the valuation of crypto assets, with the U.S. elections in November seen as a significant risk event for the crypto market. Trump has clearly expressed a welcoming stance towards the digital asset industry, while Vice President Harris recently stated that her administration "will encourage innovative technologies such as AI and digital assets while protecting consumers and investors." Given the risks associated with this asset class, any investment in digital assets should be considered in the context of the overall portfolio and the investor's financial goals.