Grayscale: Insights into the crypto market in Q4, adding 6 new potential assets

Original title: Grayscale Research Insights: Crypto Sectors in Q4 2024

Original source: Grayscale Research

Original translation: Felix, PANews

Key points

· According to the FTSE/Grayscale Crypto Industry Index, the crypto market is trading sideways 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 has not performed as well as 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 field, it still sees multiple reasons why Ethereum can maintain its position.

· The top 20 tokens compiled by Grayscale Research have been updated. The top 20 represent a diversified portfolio of assets in the crypto industry. These assets have high potential in the coming quarter. New assets added this quarter are SUI, TAO, OP, HNT, CELO, and UMA.

· The top 20 assets listed all have high price volatility and should be considered high risk; the US election may also be a major risk event for the crypto market.

Grayscale Crypto Sectors provides a comprehensive framework for understanding the range of investable digital assets and their relationship to the underlying technology. Based on this framework and in partnership with FTSE Russell, the FTSE/Grayscale Crypto Industry Index Series was developed to measure and monitor the crypto asset class (Exhibit 1)

Exhibit 1: Crypto Industry Indexes measure asset class performance

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

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

Chart 2: Bitcoin has outperformed this year, but Ethereum has continued to perform well

Ethereum has lagged behind Bitcoin this year, gaining 13%, but has outperformed most other crypto assets. For example, the Crypto Sector Market Index (CSMI, which measures returns across the entire asset class) is down about 1% this year. In fact, excluding Ethereum, the Smart Contract Platform Crypto Industry Index is down about 11%, so Ethereum has clearly outperformed its market segment. Across all assets within the crypto framework, Ethereum has returned about 70-75% year-to-date. So, while Ethereum has appreciated less than Bitcoin, it has still performed well this year compared to the crypto industry and the broader CSMI.

Focus on Smart Contract Platforms

Unlike Bitcoin, which dominates the crypto space, Ethereum faces stiff competition in the smart contract platform space. This year, a number of alt smart contract platforms have gained traction, including Solana, Toncoin, Tron, and Near, as well as new platforms like Sui. These assets are all competing for fee revenue, and the "smooth" user experience provided by some smart contract platforms may lead to a decline in Ethereum L1's fee market share.

At the same time, Ethereum has various comparative advantages to support its dominance (Table 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 the largest Ethereum L2 network is included, Ethereum has the second-highest number of daily active users after Solana.

Chart 3: Ethereum is the leader in the smart contract platform fee income category

As public blockchain technology continues to be adopted, the entire smart contract platform is expected to grow in users, transactions, and fees. This is likely to benefit all assets in the category to some extent. Since Ethereum is the leader in this category, with its existing network effects, it will benefit from the continued growth of smart contract platforms. For this reason, even though Ethereum faces fierce competition, it remains an extremely attractive asset in the crypto space.

In addition, Ethereum benefits from certain specific features that may keep it ahead of its competitors for now. These features include high network reliability, high economic security, high decentralization, and clearer regulatory status in the United States. There are also encouraging adoption trends emerging in the Ethereum ecosystem, including tokenization, prediction markets, and building by large companies such as Sony. For all these reasons, Grayscale Research continues to believe that Ethereum is 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 that have high potential in the coming quarter (Table 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.

6 new assets will be included in the fourth quarter:

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

Bittensor: A platform that promotes 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 built for mobile devices, transitioning to the Ethereum L2 network, with a focus on stablecoins and payments.

UMA Protocol: An Optimistic oracle network that serves the leading blockchain-based prediction market Polymarket (among other protocols).

Chart 4: High Potential Assets in the Crypto Industry in the Fourth Quarter of 2024

The newly included blockchains reflect several crypto themes that Grayscale Research focuses on. Both Sui and Optimism can 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 had a network upgrade that increased transaction speeds by 80%, surpassing Solana, which has recently seen an increase 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 "superchains." Coinbase's L2 network Base and Sam Altman's Worldcoin built L2 are both using this framework.

Both Celo and UMA benefit from unique adoption trends: stablecoin usage and prediction markets. Celo is a blockchain focused on stablecoins and payments in the developing world, gaining traction in Africa, led by the MiniPay app for the Opera browser. Celo recently surpassed Tron as the blockchain with the most daily stablecoin addresses. It is currently migrating from a standalone blockchain to Ethereum L2 in the Optimism hyperchain 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 outcome on-chain and facilitates voting on disputes over Polymarket outcomes, ensuring that resolution is free from centralized, arbitrary, or biased interference.

Helium is a leader in the DePIN (Decentralized Physical Infrastructure Network) category, leveraging a decentralized model to efficiently allocate wireless network coverage and connectivity resources and reward participants for maintaining network infrastructure. Helium has expanded to over 1 million hotspots and 100,000 mobile users, with over $2 million in network fee revenue year to date.

While Bittensor has focused on the decentralized AI theme for some time, it has only now been included in the crypto industry framework due to improvements in market structure, specifically more available pricing sources and higher liquidity. Bittensor has emerged as a dominant player in both the crypto and AI space, aiming to create a global decentralized platform for AI using economic incentives.

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

Investing in crypto assets involves risks, some of which are unique to crypto assets, including smart contract vulnerabilities and regulatory uncertainty. In addition, all assets in the top 20 are highly volatile and should be considered high risk and are not suitable for all investors. Finally, broader macroeconomic and financial market developments may impact cryptoasset valuations, and the U.S. election in November should be viewed as a significant risk event for crypto markets. Trump has clearly welcomed the digital asset industry, and Vice President Harris recently stated that her administration "will encourage innovative technologies such as artificial intelligence and digital assets while protecting consumers and investors." Given the risks of this asset class, any investment in digital assets should be considered in the context of a portfolio and with consideration of the investor's financial goals.

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