Crypto markets moved sideways in Q3 2024, as measured by the FTSE/Grayscale Crypto Sectors family of indexes. This, according to an extensive report from Grayscale.
Grayscale noted in its report that changes to the FTSE/Grayscale family of indexes this year highlight emergent themes “for the digital assets industry, including the rise of decentralized artificial intelligence (AI) platforms, efforts to tokenize traditional assets, and the popularity of memecoins.”
The Grayscale research report pointed out that “although Ethereum has underperformed Bitcoin year to date, it has outperformed the Smart Contract Platforms Crypto Sectors index.”
Grayscale Research sees several reasons why Ethereum “should hold its own despite stiff competition in the smart contracts segment.”
Grayscale have updated the Grayscale Research Top 20.
The Top 20 represents a diversified set of assets “across Crypto Sectors that, in our view, have high potential over the coming quarter.”
The new assets this quarter are SUI, TAO, OP, HNT, CELO, and UMA.
All of the assets in their Top 20 list have high price volatility and should be “considered high risk; the U.S. election may also be a significant risk event for crypto markets.”
Grayscale Crypto Sectors provides “a comprehensive framework for understanding the universe of investable digital assets and how they relate to the underlying technology.”
Based on this framework and in partnership with FTSE Russell, they developed “the FTSE Grayscale Crypto Sectors Index Series to measure and monitor the crypto asset class (Exhibit 1). Grayscale Research incorporates the Crypto Sectors indexes into its ongoing analysis of digital asset markets.”
The Crypto Sectors framework is designed “to update dynamically with the evolving digital assets marketplace and rebalances around the end of each quarter.”
The latest quarterly rebalancing process “concluded on September 20.”
Since the start of this year, the index rebalancing process has resulted in meaningful changes to index composition, “reflecting new exchange listings, changes in asset liquidity, and market performance. Updates to the Crypto Sectors indexes this year highlight emergent themes for 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 standpoint, Bitcoin and the Currencies Crypto Sector have “surpassed other market segments in 2024, possibly reflecting the successful launch of spot Bitcoin exchange-traded products (ETPs) in the U.S. market and a favorable macro backdrop for the asset (for more detail, see our prior quarterly report, Grayscale Research Insights: Crypto Sectors in Q3 2024).”
Ethereum has underperformed Bitcoin this year “with a gain of 13% but has outperformed most other crypto assets.”
For example, our Crypto Sectors Market Index (CSMI) — which “measures returns for the asset class as a whole — is down about 1% on the year.”
In fact, excluding Ethereum, the Smart Contract Platforms Crypto Sector Index “is down about 11%, so it has meaningfully outperformed its market segment.”
Across all assets within our Crypto Sectors framework, Ethereum’s year-to-date “return falls around the 70-75th percentile.”
Therefore, despite appreciating “less than Bitcoin, Ethereum is holding its own this year compared to its Crypto Sector and the broader CSMI.”
Unlike Bitcoin, which dominates the Currencies Crypto Sector, Ethereum faces “meaningful competition within the Smart Contract Platforms Crypto Sector.”
A number of alternative smart contract platforms have “gained traction this year, including Solana, Toncoin, Tron, and Near[3], as well as new additions to Crypto Sectors like Sui.”
These assets all compete for fee revenue, and “the compelling user experience offered by some alternative smart contract platforms may have resulted in a decline in fee market share for the Ethereum Layer 1.”
At the same time, Ethereum has a variety of comparative “advantages that support its position within the Smart Contract Platforms Crypto Sector.”
Most importantly, it remains the category leader, with “the most applications, the most developers, the highest 30d fee revenue, and the most value locked in smart contracts.”
It has the second-highest second-highest number “of daily active users after Solana when including the largest Ethereum Layer 2 networks.”
As adoption of public blockchain technology continues, Grayscale Research expects the entire Smart Contract Platforms Crypto Sector “to grow — in terms of users, transactions, and fees — which could benefit all the assets in the category to some degree.”
Because it is the category leader, it is “difficult to imagine a period of sustained growth in the smart contract platform segment that does not benefit Ethereum, partly due to its existing network effects. For this reason, even though it faces meaningful competition, in our view Ethereum remains a compelling asset within the Smart Contract Platforms Crypto Sector.”
Moreover, Ethereum benefits from certain “specific features which may stave off its competitors for a time. These include high network reliability (limited outages), high economic security, high decentralization, and clearer regulatory status in the United States. There have also been encouraging adoption trends within the Ethereum ecosystem, including tokenization, prediction markets, and building by large companies like Sony.”
For all of these reasons, Grayscale Research continues to “see a very compelling investment thesis for Ethereum.”
Each quarter the Grayscale Research team analyzes hundreds of digital assets to inform the rebalancing process for the FTSE/Grayscale Crypto Sectors family of indexes. Following this process, Grayscale Research produces a Top 20 list of assets within the Crypto Sectors universe.
The Top 20 represents a diversified “set of assets across Crypto Sectors that, in our view, have high potential over the coming quarter.”
Their approach incorporates a range of factors, “including network growth/adoption, upcoming catalysts, sustainability of fundamentals, token valuation, token supply inflation, and potential tail risks.”
This quarter we are incorporating six new assets into the Top 20:
- Sui: A high-performance Layer 1 smart contract blockchain offering innovative applications (for more details, see Building Block: Sui).
- Bittensor: A platform facilitating the development of open and global AI systems (for more details, see Building Block: Bittensor).
- Optimism: An Ethereum scaling project based on optimistic rollups (a type of scaling solution).
- Helium: A decentralized wireless network running on Solana and leader in the decentralized physical infrastructure (DePin) category.[7]
- Celo: A mobile-first blockchain project transitioning to an Ethereum Layer 2 network, with a focus on stablecoins and payments.
- UMA Protocol: An optimistic oracle network providing services to Polymarket, a leading blockchain-based prediction market (as well as other protocols).
