VanEck Crypto Monthly Recap for January 2025

Please note that VanEck may have a position(s) in the digital asset(s) described below.

Bitcoin led all major asset classes again with a 9% increase in January, despite AI-induced volatility that saw the Nasdaq (+1.6%) lag behind the S&P 500 (+2.7%)—a rare dynamic in recent months. Innovations like those proposed by DeepSeek, which promise to significantly lower AI training costs and energy demands, could reshape market expectations for computational efficiency. This aligns with the Trump Administration’s pro-growth energy policies, which, if successfully executed, could ensure more abundant and affordable energy—a cornerstone of productive societies—benefiting Bitcoin, Bitcoin miners, Big Tech, data center operators, and consumers alike.

• Revenue Comparison
• Notable Performer: Solana
• Ethereum Update
• Virtuals Protocol

Still, uncertainty looms over the future energy demands of both AI and Bitcoin, especially given the rapid pace of innovation and the substantial capital required for electrical infrastructure. For data center operators, diversifying their high-energy clientele is becoming a prudent strategy—not just as a hedge against fluctuating energy policies and prices, but also to keep pace with evolving technological needs. As if to punctuate this point, Masayoshi Son’s Softbank acquired a 3% stake in leading Bitcoin miner Cipher (CIFR, market cap $2B) on January 31st.

Masa’s decision underscores a sophisticated understanding of the natural hedge provided by integrating Bitcoin mining with AI high-performance computing (HPC). His strategic bets, though occasionally mistimed, have largely paid off over more than four decades, demonstrating a keen sense of emerging market trends. By enhancing CIFR’s computing capabilities and leveraging its energy infrastructure, this investment sets a precedent that other mega-cap tech CEOs may follow, recognizing the advantages of combining Bitcoin and AI.

Such strategic integration could unlock significant economic efficiencies, benefiting Bitcoin, Bitcoin miners, and the entire AI value chain. More importantly, it further establishes Bitcoin as a key benchmark hurdle rate for innovators—where capital allocators must weigh its scarcity and resilience against alternative investments in the evolving digital economy.

Price Returns

Source: Bloomberg as of 1/31/2025. Index performance is not representative of fund performance. It is not possible to invest directly in an index. Past performance is no guarantee of future results. Not intended as a recommendation to buy or sell any securities named herein.

January was a mixed bag for smart contract platform tokens (SCPs). The MVSCLE index of layer 1s we track gained +6%, but most tokens finished the month in the red. Excluding BTC, only four of the top 15 L1s posted gains—SOL (+18%), HBAR (+14%), ALGO (+13%), and ADA (+12%)—while Scroll (SCR -32%) and Starknet (STRK -25%) were the biggest laggards. Volatility remains the norm, but with fundamentals increasingly driving performance, dispersion among L1s is only getting more pronounced.

The Market Share of Top SCP Projects is Increasing

Source: Artemis as of 1/29/2025. Past performance is no guarantee of future results. Not intended as a recommendation to buy or sell any securities named herein.

Fewer Tokens Are Outperforming

Expanding the view to the top 100 crypto tokens by market cap, 57 finished January in the red despite BTC (+9%) and XRP (+43%) posting strong gains. Among the 30 smart contract platforms (L1s, including BTC) we track, only six have gained market share over the past year, and just 13 have grown their market cap in absolute terms since January 2024.

BTC, BNB, SOL, TRX, TON, and SUI led in market share dominance, increasing their slice of the SCP market cap (including BTC) from 71% to 82%. However, excluding BTC, the top five SCPs saw a more modest rise—from 10.5% to 12%. Notably, only SUI and TON have outperformed BTC over the past year among L1s and L2s.

Blockchain Tokens with Strong Fundamentals are Outperforming

Investor liquidity is increasingly concentrating on established winners among non-BTC tokens, signaling a shift toward projects with robust fundamentals. While BTC remains dominant—bolstered by its mindshare and $39.5B in ETF inflows since early last year—select smart contract platforms (SCPs) are standing out.

Outside of BTC, the top five relative performers also lead in fundamental metrics. SOL, TRX, SUI, and TON have all gained a larger share of total SCP revenue in the past year. SOL, TRX, and SUI have increased their share of total DEX volume, while SOL, TON, and SUI have grown their market share of daily active crypto wallets—despite the metric’s flaws. This suggests that improving fundamentals are increasingly driving long-term token performance.

For years, many sophisticated crypto market participants have dismissed fundamentals, assuming that hype and liquidity flows drive prices. This skepticism stems from the rapid migration of users to new platforms, short-term metric manipulation by low-quality projects, and the difficulty of detecting fraudulent data. However, as crypto matures, the ability to fake traction is diminishing. Investors are increasingly scrutinizing project founders, making it harder for weak projects to sustain inflated metrics.

Solana Revenue Was Greater than the Total of the Next Four Chains in Jan 2025

Source: Artemis as of 1/29/2025. Note: Exclusive of MEV. Past performance is no guarantee of future results. Not intended as a recommendation to buy or sell any securities named herein.

Solana (+19%) Has Become the L1 Leader

Solana continues to dominate among layer 1s across key fundamental metrics. In January, it led in DEX volumes (45% market share), chain revenues (45%), and daily active wallets (33%). As expected, Solana has become the focal point for on-chain crypto trading, driven by a strong developer community and a design optimized for high user activity. If January’s figures are extrapolated, Solana is generating revenue at an annualized rate of $6B.

A blockchain’s revenue typically comes from three sources:

1. Base Fee – The minimum cost to use the network (1% of Solana’s January revenue).
2. Priority Fee – The additional tip users pay to ensure faster transaction inclusion (43%).
3. MEV (Maximal Extractable Value) – Fees earned by block builders for optimizing transaction order and execution (56%).

Solana’s revenue mix highlights its growing transaction demand, with priority fees and MEV extraction playing an outsized role.

Solana Has a Clear Path to Organic Revenue Growth – Better Monetization of MEV

Right now, the majority of Solana’s revenue comes from Maximal Extractable Value (MEV)—a controversial source of profit since it often benefits sophisticated traders at the expense of everyday users. This occurs because Solana’s low-latency design enables block builders to influence trade execution, capturing value that might otherwise go to users. MEV exists on all blockchains, but some manage it more efficiently than others.

Ethereum mitigates MEV extraction through Flashbots, a software add-on that allows open bidding on block-building rights. Every 12 seconds, a new block is auctioned off in ETH, and validators retain 95% of the MEV revenue while block builders keep just 5%. Since bids are priced in ETH, this process supports Ethereum’s revenue and demand for ETH.

Solana has a similar system called Jito, which auctions block-building rights in SOL. However, due to Solana’s architecture and ultra-low latency, block builders capture an estimated 60% of MEV value, while validators keep just 40%. This means that while Solana’s total MEV pie is estimated at $8.4B, only $3.4B goes to validators and their stakers.

If Solana validators were able to capture 80% of MEV—closer to Ethereum’s model—MEV-derived revenue for validators would surge from $3.4B to $6.8B, representing a 56% revenue boost for SOL. This shift could be facilitated by Jito upgrades, Solana protocol improvements, and the rollout of Firedancer, potentially increasing SOL’s intrinsic value.

Solana 2024 Revenue Would Increase $950M (+49%) if MEV Take Rate 40% → 80%

Source: Blockworks as of 1/31/2025. Past performance is no guarantee of future results. Not intended as a recommendation to buy or sell any securities named herein.

Solana’s Obstacles to Gaining More MEV

Despite this opportunity, Solana’s MEV ecosystem has structural inefficiencies that reduce revenue potential:

• Private Mempools and Insider Advantage: 92% of Solana validators run Jito’s MEV auction software, yet many also participate in private mempools, where pending transactions are pooled before execution. Block builders with access to these mempools have an unfair edge, as they can better predict which trades will be executed and bid less aggressively in Jito auctions. This lowers block auction prices and reduces demand for SOL to pay for those auctions.
• Bundled Trades and Arbitrage Extraction: Sophisticated traders use private mempools to bundle trades that capture arbitrage opportunities, sending these pre-packaged bundles directly to validators.

By contrast, Ethereum’s MEV data is largely public, preventing the same level of insider advantage. If Solana could reduce the influence of private mempools and bundled trades, more MEV revenue could be captured at the protocol level, increasing SOL demand.

Solutions to Improve Solana’s MEV Capture

Near-term fixes include:

• Validator whitelists to prevent collusion.
• Application-level MEV protections to limit front-running.
• RFQ (Request-for-Quote) systems to improve pricing transparency on DEXs.
• Software patches that mitigate known attack vectors.

Longer-term, Solana researchers are exploring a multi-leader model, where multiple validators propose blocks simultaneously, reducing the influence of dominant block builders and increasing revenue capture for SOL validators.

If these improvements succeed, Solana could significantly increase MEV-derived revenue, driving greater demand for SOL while reducing the advantage of insider traders.

Solana Applications Are Thriving

Solana App Revenues in 2H2024 Were 52% of Market

Source: Blockworks as of 1/31/2025. Past performance is no guarantee of future results. Not intended as a recommendation to buy or sell any securities named herein.

A key driver of an SCP’s success is the profitability of its applications. By some estimates, Solana has overtaken Ethereum in this area. In 2022, Ethereum apps generated 84% of all application revenue, while Solana apps accounted for just 0.26%. By 2024, that gap reversed—Ethereum’s share fell to 32%, while Solana’s surged to 42%.

In absolute terms, Ethereum app revenue declined 27% (from $1.3B in 2022 to $950M in 2024), while Solana’s app revenue skyrocketed 318x, from $4M to $1.25B.

This growth is attracting developers. Electric Capital ranked Solana as the top destination for new crypto developers in 2024, adding 7,625 new devs—surpassing Ethereum’s 6,456, despite ETH’s FDV being nearly 4x larger.

Updated Valuation on Solana

Solana May Grow from 15% to ∼22% of SCP Market Cap

Forecast of Blockchain Market Shares

Source: VanEck Research as of 1/31/2025. Past performance is no guarantee of future results. Not intended as a recommendation to buy or sell any securities named herein.

We value Solana (SOL) based on its projected year-end market share within the smart contract platform (SCP) market. Our SCP market cap forecast is derived from U.S. M2 money supply growth, given its strong historical correlation with crypto market capitalization.

We project M2 to reach $22.3T by the end of 2025, maintaining its 3.2% annualized growth rate since its last trough in October 2023. Using regression analysis, we estimate total SCP market capitalization will grow 43% to $1.1T by year-end 2025 (vs. $770B today), surpassing its 2021 peak of $989B. Historical data shows a strong correlation between M2 and SCP market cap, with a 12-month moving average R² of 0.36 and a t-statistic of 5.7 (p < 0.0001).

Currently, Solana holds 15% of SCP market cap, but we forecast its share to rise to 22% by EOY 2025. This projection is supported by Solana’s developer dominance, increasing market share in DEX volumes, revenues, and active users. Using an autoregressive (AR) forecast model, we estimate Solana’s market cap will reach ~$250B, implying a SOL price of $520 based on ~486M floating tokens.

Ethereum (-1%)

Solana and Sui Are Receiving Increasing Share of Ethereum's Outflows

Source: Artemis as of 1/30/2025. Past performance is no guarantee of future results. Not intended as a recommendation to buy or sell any securities named herein.

Market Sentiment

Despite declining 1% this month and outperforming most L1s aside from SOL, Ethereum (ETH) sentiment remains weak. At its peak in December 2021, 1 ETH was worth 8.8% of 1 BTC—but since then, ETH/BTC has continued to slide, even amid a broader crypto bull market. This month, the ratio hit a new cycle low of ~3.0%, marking a 66% drawdown from its previous peak.

One key reason for ETH’s underperformance is capital outflows from its ecosystem to alternative Layer-1s like Solana and Sui (red-shaded TVL). Ethereum’s Total Value Locked (TVL) includes not just assets on its base layer but also those on Layer-2s like Arbitrum, Optimism, and Base (blue-shaded TVL)—yet capital is increasingly shifting to cheaper, faster chains.

Solana and Sui attract users with superior speed, cost-efficiency, and accessibility, making them prime hubs for DePIN, trading, and retail activity. However, these alt-L1s lack Ethereum’s deep liquidity, established application codebase, and network effects.

To stay competitive, Ethereum core developers are pushing upgrades to blend high-performance UX with L1 security and decentralization. The next major upgrade, Pectra, is slated for March, aiming to improve Ethereum’s user experience and maintain its dominance.

The Upcoming Pectra Upgrade: A Key Step Toward L2 Scalability

Ethereum’s Pectra upgrade aims to enhance Layer-2 (L2) scalability, reduce costs, and improve interoperability, making Ethereum more competitive with alternative Layer-1s.

Key Upgrades in Pectra

EIP-7691: Doubles the number of “blobs” available on Ethereum, expanding L2 capacity by allowing more transactions to offload data to Ethereum L1. Introduced in Dencun (March 2024), blobs have already driven down L2 transaction costs, enabling a surge in transaction volume as seen in the chart below.

EIP-7702: Implements account abstraction, simplifying wallet setups and transactions, eliminating the friction of Ethereum’s legacy Solidity design.

EIP-7251: Increases the validator staking limit from 32 ETH to 2048 ETH, reducing overhead costs and enhancing Layer-1 efficiency.

L2 Transaction Costs Declined 84% While Volume Grew 364% YoY

Source: Artemis as of 1/30/2025. Past performance is no guarantee of future results. Not intended as a recommendation to buy or sell any securities named herein.

With these upgrades, Ethereum aims to improve user experience and scalability while maintaining its L1 security advantages.

What to Watch Post-Pectra

Smart Contract-Based Wallets: Account abstraction will enable more flexible, user-friendly wallets, rivaling Solana’s Phantom. Expect innovations like customizable gas payments, recovery mechanisms, and transaction automation to improve Ethereum’s UX.

New Application Growth: Lower fees will unlock cost-prohibitive use cases in trading, betting, social media, and NFT platforms, increasing Ethereum’s appeal to retail users.

DeFi & Financial Services Expansion: Cheaper transactions will enhance DeFi accessibility, micropayments, and cross-border payments, positioning Ethereum to challenge traditional payment networks that charge 1.5%-3.5% per transaction.

Bottom Line

Pectra is a further evolution of Ethereum’s L2-first scaling strategy, aiming to improve efficiency without sacrificing decentralization. With better UX, lower fees, and stronger DeFi infrastructure, Ethereum bulls hope the Pectra fork will catalyze the next wave of adoption.

Virtuals (-46%)

Virtuals Protocol Revenue Has Fallen ∼78% since Dec 31

Source: Dune Analytics – jdhyper as of: 1/31/2025.

Virtuals Protocol (VIRTUAL) fell ~46% month-over-month, shedding nearly $2B in market cap. Despite this, it remains a top performer this cycle, with its token still up 500% from $0.34 to $2.04 over the past three months. We take a deeper look below:

What is Virtuals Protocol?

Virtuals Protocol is a blockchain-based platform for AI-powered agents, split into:

• IP Agents – Entertainment-focused AI personalities, often engaging on social platforms.
• Functional Agents – Task-oriented AI tools.

Each AI agent has a unique token, creating a speculative market. $VIRTUAL serves as the base currency, used for trading agent tokens, inference payments, and liquidity pools.

This raises two key questions:

• What is the utility of individual agent tokens?
• How does this impact the broader VIRTUAL token?

Critics argue agent tokens are mere speculative wrappers with little fundamental value. Proponents claim they represent a new asset class, offering governance, revenue-sharing, and potential future utilities, fostering a community-driven AI economy.

The Role of $VIRTUAL

Unlike agent tokens, $VIRTUAL’s value depends on the entire ecosystem. Its key functions:

• Agent Creation: Requires VIRTUAL, locking liquidity and exerting deflationary pressure.
• Trading & Liquidity: Agent tokens are paired with VIRTUAL in liquidity pools, ensuring demand.
• Inference Payments: Users pay for agent interactions in VIRTUAL, which is burned, reducing supply.
• Swap Fees: A 1% fee on trades, distributed to agent creators, affiliates, and subDAOs.

What to Watch Next

Virtuals’ daily revenue has dropped 78% since December 31, driven by declining trading volume and a 91% drop in protocol revenue since its December 2 peak. Investor confidence was further impacted by a now-patched security flaw in early January.

Additionally, capital flowed into the official TRUMP meme coin, which reached a $76B valuation in two days, pulling liquidity from other crypto markets—including Virtuals.

Key Developments in January

• Solana Expansion – Virtuals is prioritizing Solana over Base.
• Multi-Framework Support – Now supports AI models like ELIZA and RIG, improving flexibility for developers.
• New Competitors – Cluster Protocol and Empyreal are emerging rivals on Base.
• Swap Fee Changes – Trading fees are now denominated in cbBTC instead of VIRTUAL, while inference payments remain in VIRTUAL and are burned.
• Revised Fee Allocation – 50% of swap fees now go to Agent subDAOs, up from 40%, reducing the cut for affiliates.

Bottom Line

Virtuals Protocol faces declining revenue, increased competition, and shifting liquidity dynamics. However, its expansion to Solana, AI model flexibility, and continued deflationary mechanics could provide long-term upside should animal spirits return to the sector.

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