The active versus passive investing debate has been present in traditional investment management for quite some time. However, when it comes to the liquid token market, active management seems to be critical. Similar to what has been observed in the stock market over decades, it is anticipated that a fat right tail in digital asset returns will be present, with only a few assets driving the majority of wealth creation in the asset class.
Historically, Bitcoin (BTC) has been the primary wealth creator in the digital asset class. Passive portfolios have struggled to outperform BTC over most calendar years and over a multiyear, full-market cycle. Interestingly, BTC is also one of the lowest volatility digital assets, making its outperformance even more impressive on a risk-adjusted basis.
A comparison of BTC’s returns to passive, market-cap weighted portfolios of the top 10, 25, 50, and 100 tokens over the past five years revealed that no passive portfolio was able to outperform BTC. In fact, some of them even suffered losses over this period. This implies that merely holding top assets and expecting them to continue outperforming is not enough.
When analyzing the annual rankings of the top digital assets by market cap, it was found that assets which fell out of the top rankings historically had trouble re-entering them. Out of the 12 assets that fell out of the top 10 rankings, none managed to re-establish their position. Meanwhile, 115 assets fell out of the top 100 ranking with only 12, or 10%, able to re-enter.
This evidence suggests that value investing in digital assets can prove to be quite challenging. An asset that has lost its appeal and may appear cheap compared to others has typically had a difficult time outpacing the market to regain its highly ranked position.
In conclusion, for those looking to invest in digital asset markets, it seems that the best options are to either buy and HODL BTC or engage in active management to outperform by identifying tokens with the fundamental momentum and potential to rise into the top ranks of the market. While passive investing might have its merits in other asset classes, when it comes to the highly volatile and rapidly evolving world of crypto, being passive may not yield the desired results for investors. The key is to remain active, vigilant, and well-informed to navigate through the digital asset markets successfully.
Source: Coindesk
