During Q3 2024, crypto markets exhibited a sideways trend, as reflected in the FTSE/Grayscale Crypto Sectors family of indexes.
Revisions to the FTSE/Grayscale index family this year spotlight new trends in the digital assets sector, such as the proliferation of decentralized artificial intelligence (AI) platforms, initiatives to tokenize traditional assets, and the growing popularity of memecoins.
Ethereum, while underperforming Bitcoin year to date, has nonetheless outperformed the Smart Contract Platforms Crypto Sectors index. Emerge Research attributes several factors to Ethereum's ability to remain resilient despite intense competition in the smart contracts segment.
The Emerge Research Top 20 list has been updated. This list is a diversified collection of assets across Crypto Sectors that we believe have strong potential for the coming quarter. Newly included assets this quarter are SUI, TAO, OP, HNT, CELO, and UMA.
All assets included in our Top 20 list exhibit high price volatility, and thus should be considered high-risk investments. Furthermore, the upcoming U.S. election may introduce significant risk for the crypto markets.
The Emerge Crypto Sectors offers a comprehensive framework for understanding investable digital assets and their connections to underlying technologies. Based on this framework, in partnership with FTSE Russell, we have developed the FTSE Emerge Crypto Sectors Index Series to monitor and evaluate the crypto asset class (Exhibit 1). Emerge Research incorporates these indexes into its ongoing analysis of digital asset markets.
Measuring Performance of the Crypto Asset Class Using Crypto Sectors Indexes
The Crypto Sectors framework is structured to adapt dynamically as the digital assets market evolves, with rebalancing occurring at the end of each quarter. The latest quarterly rebalancing process was completed on September 20. Throughout this year, changes to index composition have been driven by new exchange listings, variations in asset liquidity, and market performance. Updates to the Crypto Sectors indexes underscore emergent themes, including the rise of decentralized AI platforms (e.g., TAO), tokenization of traditional assets (e.g., ONDO, OM, and GFI), and the continued popularity of memecoins (e.g., PEPE, WIF, FLOKI, and BONK).
From a returns perspective, Bitcoin and the Currencies Crypto Sector have outperformed other segments in 2024, potentially due to the successful launch of spot Bitcoin exchange-traded products (ETPs) in the U.S. and a favorable macroeconomic backdrop (see our prior quarterly report, Emerge Research Insights: Crypto Sectors in Q3 2024 for additional information).
Ethereum has shown a 13% gain this year, which, while below Bitcoin's performance, still surpassed that of most other crypto assets. Specifically, our Crypto Sectors Market Index (CSMI) — representing the asset class as a whole — is down about 1% on the year. Excluding Ethereum, the Smart Contract Platforms Crypto Sector Index has declined by approximately 11%, indicating Ethereum’s meaningful outperformance within its sector. Across the broader Crypto Sectors framework, Ethereum's return falls within the 70-75th percentile year to date.
Unlike Bitcoin, which dominates the Currencies Crypto Sector, Ethereum faces substantial competition within the Smart Contract Platforms segment. Competing platforms such as Solana, Toncoin, Tron, and Near, as well as new entrants like Sui, have gained significant traction in 2024. These platforms compete for fee revenue, and the compelling user experiences provided by some of these alternatives have contributed to a reduction in Ethereum’s fee market share for its Layer 1 protocol.
Nonetheless, Ethereum retains numerous comparative advantages that solidify its position in the Smart Contract Platforms Crypto Sector (Exhibit 3). Most notably, it leads in several metrics: the number of applications, the number of developers, the highest 30-day fee revenue, and the total value locked in smart contracts. Additionally, Ethereum ranks second only to Solana in daily active users, considering the major Ethereum Layer 2 networks.
Ethereum Leads in Smart Contract Platform Fee Revenue
As the adoption of public blockchain technology continues, Emerge Research anticipates expansion in the Smart Contract Platforms sector — in terms of users, transactions, and fees — which could ultimately benefit all assets in the segment. Given that Ethereum is the category leader, it is difficult to envision sustained growth in the smart contract platform space that does not benefit Ethereum, owing in part to its existing network effects. Therefore, despite strong competition, we view Ethereum as a highly promising asset within the Smart Contract Platforms Crypto Sector.
Furthermore, Ethereum is backed by certain features that may keep it ahead of competitors for a while longer. These include high network reliability (limited outages), high economic security, substantial decentralization, and clearer regulatory positioning in the U.S. There are also positive adoption trends within the Ethereum ecosystem, such as tokenization initiatives, prediction markets, and development efforts by major companies like Sony. Considering these factors, Emerge Research sees a compelling investment thesis for Ethereum.
The Emerge Research Top 20
Each quarter, the Emerge Research team analyzes hundreds of digital assets as part of the rebalancing process for the FTSE/Emerge Crypto Sectors family of indexes. The Top 20 list represents a diverse selection of assets across Crypto Sectors that we believe hold high potential for the upcoming quarter (Exhibit 4). Our assessment considers various factors such as network growth/adoption, potential catalysts, the sustainability of fundamentals, token valuation, inflation rates, and possible tail risks.
This quarter, we have added six new assets to the Top 20
1. Sui: A high-performance Layer 1 smart contract blockchain offering innovative applications.
2. Bittensor: A platform enabling the development of open and global AI systems.
3. Optimism: An Ethereum scaling solution based on optimistic rollups.
4. Helium: A decentralized wireless network running on Solana and a leader in the decentralized physical infrastructure (DePin) sector.
5. Celo: A mobile-first blockchain that is transitioning to an Ethereum Layer 2, focusing on stablecoins and payments.
6. UMA Protocol: An optimistic oracle network offering services to Polymarket, a leading blockchain-based prediction market.
High-Potential Crypto Sectors Assets for Q4 2024
The newly included assets align with various themes that Emerge Research has identified within the crypto market. Both Sui and Optimism are 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 that improved its transaction speed by 80%, surpassing Solana’s transaction speed, resulting in increased adoption. Optimism, an Ethereum Layer 2, helps scale the Ethereum network and has developed a "Superchain" framework used by Coinbase’s Layer 2 BASE and a Layer 2 built by Sam Altman’s Worldcoin.
Celo and UMA are experiencing unique adoption trends related to stablecoin use and prediction markets, respectively. Celo, focusing on stablecoins and payments in developing countries, has gained traction in Africa, led by Opera Browser’s MiniPay app. Celo recently surpassed Tron as the leading blockchain for stablecoin usage by daily addresses and is transitioning to an Ethereum Layer 2 within Optimism’s Superchain framework. UMA serves as the oracle network for Polymarket, the standout blockchain application of this election year, helping to resolve prediction outcomes without centralized interference.
Helium’s addition highlights our preference for category leaders with sustainable revenues. As a leader in the DePIN category, Helium leverages a decentralized model for resource allocation in wireless network coverage. With over 1 million total hotspots and 100,000 mobile subscribers, Helium has produced over $2 million in network fee revenue year to date.
Lastly, Bittensor has been added to our framework due to improved market structure, including higher liquidity and better pricing data. Bittensor is becoming a notable player at the intersection of crypto and AI, striving to build a global decentralized platform for AI innovation.
This quarter, we removed Render, Mantle, ThorChain, Pendle, Illuvium, and Raydium from the Top 20. While these assets still hold value and remain important to the crypto ecosystem, we believe the revised Top 20 list offers more compelling risk-adjusted returns for the upcoming quarter.
Investing in the crypto asset class involves risks, including those unique to crypto, such as vulnerabilities in smart contracts and regulatory uncertainty. The assets in our Top 20 list are highly volatile and may not be suitable for all investors. Additionally, macroeconomic and financial market factors can influence valuations, and the U.S. election is expected to pose a significant risk to crypto markets. Former President Trump has embraced digital assets, while Vice President Harris has expressed a balanced approach to promoting AI and digital assets while safeguarding consumers. As such, investments in digital assets should be made in the context of an overall portfolio, considering an investor’s financial objectives.
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