The ever-evolving landscape of cryptocurrency presents a myriad of opportunities for investors, offering various strategy approaches ranging from simple buy-and-hold schemes to more complex discretionary management models. However, the choice between active versus passive investment in the crypto world still remains a blurred picture.
From blue chip banks forecasting good returns for BTC by 2024, to economists recommending crypto diversification, the avid interest in digital assets is undeniable. Advisors are now expected to provide guidance for clients keen on delving into the crypto waters. But how should they steer their investments?
They could consider a passive approach such as a buy-and-hold strategy, implemented directly via exchanges or investment trusts. This is tagged as passive due to its lack of diversification and risk management. Though it does provide a possibly relatively cost-efficient way to add digital assets to a portfolio, but it may also carry potentially high management fees and unforeseen risks.
The automated indices strategycan arguably be considered a passive exposure. It broadens your assets to include a larger number by market cap, systematically rebalancing to meet portfolio construction goals. Despite the boosted diversification and potential for positive performance compared to singular token exposures, this strategy still falls short in the realm of thematic or sector-specific allocations. It also has a typically higher-touch onboarding process than individual buy-and-hold strategies.
Alternatively, investors may turn to active management schemes that utilise discretionary blockchain expertise and quantitative on-chain analysis. This strategy offers an institutional-grade expertise for a rapidly developing and technical asset class. While it may offer potential for risk-adjusted outperformance, this too has its downside: hurdles to access, challenging manager selection due to shorter track records, and possible periods of underperformance compared to passive investments.
Ultimately, the boundary between active and passive crypto products is still murky. As crypto investing matures, we expect the lines of distinction to solidify, similar to the journey of traditional asset classes. The challenge for advisors is to navigate this new asset class, evaluate the suited risk levels, and make informed decisions for their clients.
The influx of interest following the BlackRock ETF application has undoubtedly created more queries, from portfolio allocation to risks. Most concisely put, crypto can be considered as Alternative Asset with its own set of risks. Regardless of strategy, a basic rule of thumb is, ensure the client can stand to lose all their crypto investments.
As crypto investments continue to intertwine with conventional assets, the question remains; will the same line of active and passive consideration continue? Only time can tell as we hurtle towards an even more digitally integrated future.
Source: Coindesk
