Max Freccia from Truvius shares his insights on the different investment models available for cryptocurrency investing, including buy-and-hold strategies, automated indices, and discretionary management. “As tools emerge for advisors, they can determine how to include this asset class alongside their traditional investment business,” he says. Yale Economist Aleh Tsyvinski proposed that investors should consider holding 6% bitcoin in their portfolios, and a Google search today will highlight various sources recommending an investment between 1% and 6%.
Advisors need to support clients interested in crypto investment, but which investment strategy will they take? Active or passive? This article lays out the crypto investment landscape currently available for advisors, divided into three categories with pros and cons for each as well as their active or passive nature.
Buy-and-hold is the most simplistic way to add digital assets to an overall portfolio. Pros include low cost and low complexity, while cons include lack of diversification and risk-management benefits. This represents passive exposure to a subset of digital assets.
Automated indices provide a rules-based framework for crypto exposure to a broader number of assets and systematically rebalance to meet portfolio construction goals. Pros include diversification and risk-management benefits, while cons include lack of customization and higher cost. These should be considered purely passive exposures akin to index funds for traditional asset classes.
Active managers construct strategies that leverage discretionary blockchain expertise and quantitative on-chain analysis to provide sophisticated crypto exposures. Pros include customization and higher returns, while cons include higher cost and lack of liquidity. This represents true active management commensurate with standards for traditional asset classes.
The developing nature of the digital asset investment product landscape leaves the delineation between active and passive investment products, and how to access them, fuzzy at best. Ultimately, more clearly defining the available active and passive options and how they relate to traditional investment evaluation frameworks will equip advisors to more confidently select the most appropriate digital asset solutions for their clients.