Max Freccia, Truvius, shares his views on active and passive management. He also explains how the different investment models defined in TradFi can be used to invest in cryptocurrency. There are many crypto-investing tools available, such as SMA platforms and portfolio tools. Max discusses simple buy-and hold strategies, automated indexes, discretionary management as well as the pros and cons for each.

It is fascinating to watch the maturation of this asset class and to see different models emerge to support the client’s interest and to help advisors navigate the path to digital asset investing. Advisors can decide how to incorporate this asset class into their existing investment business as tools become available. The British Standard Chartered Bank forecasted a BTC price in 2024 of $120,000. This is up from $100,000 back in April. Advisors can expect their clients to initiate conversation.

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To put things in perspective, in a study from 2019, Yale Economist aleh Tsyvinski recommended that investors hold 6% of bitcoin in their portfolios. He also suggested that “even the staunchest critics of the cryptocurrency space are better off investing 1% in this area, even if it is just for diversity.”

A Google query today, asking “How much should i invest in crypto?” will reveal a variety of sources that recommend an investment between 1% to 6%. Other recommendations go as high as 12 %.

You need to help clients who are interested in investing in crypto, but what investment strategy will be adopted? When advising clients, will you use an active or passive model of investment?

Below, we’ve included links to additional resources under the “keep reading” section for anyone interested in continuing their reading on this topic.

We will answer any questions you may have for our Advisors network, or topics that you would like to be covered in future Crypto for Advisors editions.

Look at Cryptography Through Active/Passive Lenses

Investors have been debating the allocation of active and passive management since the introduction of index funds. With time, and after decades of product development and analysis, the boundaries between active and passive investments for traditional asset classes are becoming more defined. Crypto investment products are not yet able to benefit from the same level of analysis and product development.

Advisors who invest in established asset classes are less concerned with the distinction between “active” and “passive”, and instead must determine how much risk they will take on behalf of their clients and choose from a wide range of investment vehicles that are highly competitive and easily accessible.

Advisors who are interested in digital assets face a double challenge, as “active” and passive” investment options have yet to be defined. They also lack sophistication and accessibility.

What does “active” management look like in crypto today? This framework presents the current crypto investment landscape available to advisors. It is divided into three categories, with pros and cons of each category as well as active or passive nature.

1. Single Token Buy-and-Hold

Buy-and-hold, which is often implemented directly through exchanges via separately managed accounts (SMAs) and investment trusts (especially when there are no SEC-approved ETFs for spot), is the easiest way to add digital asset to a portfolio.

  • Cryptocurrency: Direct access
  • Low Portfolio Management Cost
  • Existing wealth management platforms could make this technology more accessible.

  • Lack of Diversification
  • Customers can obtain exposure independently
  • Management fees that could be excessive for naive exposure

Active vs. Passive: This is passive exposure to a small subset of digital assets, such as BTC or ETH. However, it lacks the benefits of diversification and risk management that passive indices with typical rules provide.

2. Automated Indices

Automated indexes are a framework that is based on rules and allows crypto exposure across a wider range of assets. (Typically, the top 10-25 assets ranked by market capital) They also rebalance systematically to achieve portfolio construction goals. Investors in the United States often gain access to these products via multi-asset SMAs.

  • Diversification potential and performance gains compared to single-token exposure
  • Portfolio construction based on rules creates consistent exposure to broader crypto markets

  • The current options lack personalized customization or nuanced allocations based on sector or theme.
  • Onboarding is typically more intensive compared to individual buy-and hold
  • Underperformance of products that are actively managed

Active vs. Passive: Although some tout these products’ automated nature (i.e. rebalancing), they should be considered passive exposures similar to index funds.

3. Quantitative Management or Discretionary Management

Active managers create strategies that combine discretionary blockchain expertise with quantitative on-chain analyses to offer sophisticated crypto exposures. They are usually accessed through hedge funds or specialized SMAs.

  • Expertise of the highest level for a rapidly evolving and technically-oriented asset class
  • Risk-adjusted performance potential and/or reduced market correlation
  • Risk management and execution of trades are often superior.

  • There are many barriers to accessibility, such as limited capacity or high minimum investment requirements.
  • Shorter track records can make it difficult to select a manager
  • Passive products may exhibit periods of poor performance compared to active products

Active vs. Active vs.

Bring Crypto Investment Products to Focus

As the landscape of digital asset investment products continues to evolve, it is difficult to distinguish between active and passive investments, or how they can be accessed. Advisors can select digital asset solutions with greater confidence if they are able to define the active and passive options available and their relationship to the traditional framework for investment evaluation.

Max Freccia

Ask a Consultant

Since the BlackRock ETF application we’ve received more questions about portfolio allocation.

How can I include crypto in my portfolio?

Crypto is usually considered an Alternative Asset due to its risk characteristics. Most Alts, however, are illiquid. They’re only available to accredited investors and require high minimums. Cryptocurrency is extremely liquid and accessible to all investors with no minimum investment.

Risk is important, but not the only factor. Advisors should ensure that clients can afford to lose their entire crypto investment.

Should I rebalance my portfolio?

It depends on your investment thesis and the risk profile you have as a client.

You will likely keep bitcoins for several years if you are investing for the long-term as an inflation hedge. If you choose to allocate crypto as part your overall risk management strategy and diversification, you will probably rebalance it quarterly (a method that has performed better than the S&P).

Should I recommend that my clients invest in crypto or a mutual fund?

Consult your compliance department to see what they allow. There is a possibility that a bitcoin ETF will be released this year. However, there are several other ETFs, and other investments, which already provide exposure to crypto, and have been approved. These funds can be easily transferred into retirement accounts.

It is the same as holding a physical bearer instrument. It requires more technical knowledge and involves some technical risks.

It depends again on the investment thesis. Funds are a great way to give your clients exposure without them having to learn about wallets or other custodial technologies. Holding crypto in wallets is a good option if you and your client subscribe to long-term, revolutionary theories.

Continue Reading

U.S. Crypto exchanges only transact less that 10% of all crypto trades in the world. This market share is likely to increase as adoption increases on the U.S. Market to support the onshore settlement and trade.

PWC Asia conducted a survey of investors and institutions who stated that self-custody is difficult and rigid when trading cryptocurrency. As crypto adoption increases, advisors who manage clients’ investments will face the same challenges.

What will happen to crypto investments in 401Ks? Advisors have begun to include crypto assets in retirement savings accounts. Will the same active vs passive considerations continue to be made?

Pete Pachal is the editor.