Unpacking Grayscale’s Report on Q3 2024
At the end of the first half of 2024, Grayscale published “Research Insights: Crypto Sectors in Q3 2024.” Instead of classifying cryptocurrencies by their narratives or ecosystems, Grayscale divides them into five sectors: Currencies, Smart Contract Platforms, Financials, Consumer & Culture, and Utilities & Services, noting that “their valuations are subject to different fundamental and technical drivers.”
The report compares the performance of these five sectors in the first half of the year. To reduce Bitcoin’s dominance, Grayscale’s Crypto Sectors Market Index (CSMI) weights assets by the square root of their market capitalization, revealing a decline of approximately 3% since the beginning of 2024. However, on a market cap-weighted basis, the CSMI increased by 30%, driven by Bitcoin’s substantial gains and its significant share of total market capitalization (about 60%). This performance places Currencies as the top-performing sector, while Consumer & Culture, Smart Contract Platforms, and Utilities & Services sectors showed negative performance.
Grayscale also introduced an “Advance/Decline” index to measure crypto market breadth, tracking the net percentage of Crypto Sectors’ tokens experiencing price increases versus declines. The index indicates a decline since its peak around late March/early April 2024, with only about 30% of tokens across Crypto Sectors appreciating in price in the past 6 months.
Over the past half-year, certain narrative themes such as AI and Memecoins have outperformed others. Grayscale notes, “While market focus may change, persistent themes like these provide insights into future market performance.”
Looking ahead, Grayscale highlights the approval of Spot Ether ETPs in the U.S. market as a significant event for the upcoming quarter. Additionally, they have listed the Top 20 high-potential assets for Q3 2024, selected based on immediate catalysts, trending themes, and favorable adoption trends specific to each protocol, while also considering low or moderate token supply inflation.
A Few Reflections
According to the report, in the absence of major innovations or new narratives, the only potential catalyst for market upside in the third quarter might revolve around the Spot Ether ETPs, which would benefit the entire ETH ecosystem.
However, current performance of many protocols within the ETH ecosystem appears mediocre, possibly due to current market illiquidity and pessimistic sentiment. On the flip side, this also suggests that the market hasn’t yet priced in the impact of this, presenting an opportunity for the third quarter. Of course, if Spot Ether ETPs fails to materialize or if new narratives do not emerge, the market is likely to revert back to several existing narratives, which is also a plausible scenario.
What’s more, Grayscale’s crypto sectors offers us a new perspective. Instead of categorizing based on traditional narratives or concepts within crypto, they are based on the fundamental functions of protocols or tokens. We can further expand and elaborate from this prospective :
1. Currencies: In the realm of cryptocurrencies, stablecoins serve as a measure of value. Therefore, under this classification, the functional of currencies in crypto are best represented by store of value, payments, and global currency. BTC primarily embodies store of value and global currency functions under this category, while XRP represents the payment function.
2.Smart Contract Platforms: Setting aside technical standards, the fundamental role of many L1 and L2 protocols is to serve as platforms for smart contracts.
3.Financials: The financial sector can be understood as protocols that provide intermediary services related to credit, leverage, risk, and more. This includes trading intermediaries, payment intermediaries, credit intermediaries, etc.
4.Consumer & Culture: Demands and innovations that emerged from crypto culture can be categorized under this sector, which directly targets users. Therefore, its core focus lies in user experience.
5. Utilities & Services: This sector represents crypto’s public infrastructure and utilities, you may think it as a road network or power grid, serving the entire ecosystem.
Despite the prevailing pessimism in the current market, it’s undeniable that there were great innovations occurred in the crypto space over the past two years. While perhaps not as abundant or revolutionary as expected, innovation itself is discontinuous and non-linear by nature — it doesn’t follow a continuous path. If you can’t see the direction clearly, you should gain a broader perspective.
Currently, we’re experiencing a halftime break for innovation — a phase of consolidation before potential momentum builds. Drawing on Howard Marks’ cycle theory, it’s evident we’re in a downward swing where market panic may trigger indiscriminate selling of both good and bad assets. Nevertheless, as the cycle naturally corrects, the good assets typically rebound more swiftly.
Thus, the decline in prices of altcoins serves as a self-repairing process. The oversupply and token unlocks without corresponding growth in demand naturally lead to price corrections, bringing pricing back to rational levels. Only then the industry will truly innovate, focusing on applications that address real-world problems based on genuine user needs, rather than relying on packaging, replication, marketing, or concept rebranding to attract funding and speculative users in bubbles.
Despite the market now flooded with overpriced protocols of questionable utility, there are undoubtedly some protocols with real user scenarios, profitable models, and competitive moats that exist. These protocols are the true assets of the crypto world that can endure through market cycles.
For instance: Lending, as a mature business model, platforms like AAVE are likely to thrive long-term. UNI, with genuine user demand and fee collection mechanisms, forms a sustainable business loop. Similarly, protocols like LDO, MKR, and LINK with clear profit models and real user demand are likely to shine in the future as well.
