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The professionalization of cryptocurrency has become a reality, whether it's tokenized securities, crypto futures from the world's largest asset management companies, or platforms enabling financial advisors to enter this emerging market directly.
In the cryptocurrency field, there's a vast amount of knowledge to master, yet time is extremely limited. How do you craft effective investment strategies for clients? Eric Ervin, CEO of Onramp Invest, suggests advisors consider which cryptocurrency investment models to adopt as client interest in crypto investments continues to rise. Leo Mindyuk, CEO of ML Tech, discussed active and passive Bitcoin and other cryptocurrency investment strategies in an expert Q&A session.
Tip of the iceberg: Crafting crypto strategies without burnout
My team and I have been discussing significant shifts in the cryptocurrency market. Compared to a year ago when everyone was directly engaging with investors, encouraging them to participate in extensive exchange operations and self-directed investments, we now see more concentrated efforts aimed at supporting professionals. Undoubtedly, whether it's tokenized securities, crypto futures from the world's largest asset management companies, or platforms supporting financial advisors in entering this emerging market directly, the professionalization of cryptocurrency is rapidly taking shape.
This is good news for advisors. It not only means clients can access a wider range of digital assets but also that advisors can now roll out new products in their business by providing the services clients need and increasing their assets under management (AUM). Companies equipped with access solutions will thrive. As seen in the case of Bitcoin ETFs, there is a clear demand for cryptocurrencies from investors, opening doors for advisors to a broader digital asset world. However, despite the diverse demand for digital assets, the recommended allocation of cryptocurrencies in portfolios remains only 1-6%. When 95% of your business book is traditional market funds, how do you keep up with every token or leader in this 24/7 ever-changing market?
In traditional markets, there are professional asset management companies that can manage these tasks on your behalf. Why not leverage the same tools to navigate markets you're not yet familiar with?
Applying familiar tools to unfamiliar markets
Just like in traditional markets, using separately managed accounts (SMAs) doesn't mean due diligence can be replaced; they allow advisors to capitalize on carefully researched strategies to cover the best parts of the digital asset market. Let's delve into how RIAs apply this traditional tool to new asset classes:
Five ways cryptocurrency strategies from asset management firms benefit advisors
Diversification: Cryptocurrency models enable advisors to offer diversified investment portfolios to clients, helping reduce overall risk by spreading investments across assets with different risk characteristics.
Customization: Advisors can tailor cryptocurrency models to the specific investment goals and risk tolerances of individual clients. They can adjust portfolio compositions based on market conditions, client preferences, and investment strategies.
Transparency: Many cryptocurrency asset management companies provide real-time transparency into portfolio holdings and performance. This transparency helps clients track their investments and understand how funds are managed, building trust.
Professional management: Advisors can leverage the expertise and insights of top asset management firms to make informed investment decisions on behalf of clients.
Time-saving: With asset management firms providing the latest market insights, automatic rebalancing, and thoughtful allocations, advisors save hours of research time, allowing them to focus on other critical aspects of client investment portfolios.
Fully leveraging the asset class for clients
We've all heard the saying "make your money work harder," but it applies just as much to digital asset investments. Investing all assets in Bitcoin is akin to putting all your money into one stock. The digital asset market experiences significant seasonal changes, meaning the performance of lesser-known cryptocurrencies or altcoins may outpace Bitcoin or Ethereum at times. When investors don't consider a comprehensive cryptocurrency investment strategy, they overlook harnessing the market's potential in meaningful ways. As professionals, you can now help them fully utilize these opportunities by providing access to a broader ecosystem.
Meeting demand and accumulating expertise
It's understandable to feel daunted by the extensive education required for cryptocurrencies. Everyone has different needs and values. Through asset management strategies, you can address the market head-on, accumulating knowledge in the process while meeting demands and maintaining your company's relevance. This market is continually evolving, and industry leaders like Onramp Invest are committed to keeping you ahead.
Expert Consultation
Question: What are the main differences between active and passive cryptocurrency investment strategies? How do they affect risk and potential returns in the volatile cryptocurrency market?
In the cryptocurrency market, as in traditional markets, active and passive investment strategies offer two different approaches to portfolio construction and management. Passive investment strategies typically involve selecting a basket of cryptocurrencies and holding them long term, unaffected by short-term market fluctuations. This strategy can be implemented through purchasing cryptocurrency ETFs or holding diversified portfolios, whether through funds or separately managed accounts (SMAs). This strategy often involves less ongoing management, lower trading costs, and simpler tax treatment due to lower trading frequency. In highly volatile market environments, successful passive strategies can often achieve returns close to their benchmarks, such as the performance of a Bitcoin ETF closely resembling a long-term holding strategy, albeit with higher volatility and potential larger drawdowns.
In contrast, actively managed cryptocurrency strategies aim to generate attractive absolute returns or outperform the market average by exploiting market inefficiencies and employing sophisticated risk management. Active strategies typically involve ongoing market monitoring, active risk control, higher trading costs, and higher performance and management fees paid to professional asset managers. If executed properly, active strategies can effectively mitigate asset class volatility and drawdowns, achieving higher risk-adjusted returns. Active management strategies are diverse, catering to different investment objectives and risk-return expectations.
In the challenging cryptocurrency market, choosing between active and passive strategies can significantly impact investor outcomes.
Question: What types of active investment strategies exist?
For investors, there are various active management strategies, each with different risk and return characteristics. For example, strategies like funding rate arbitrage, basis arbitrage, statistical arbitrage, and long-short and short-term directional strategies aim to achieve absolute returns. These strategies are typically complex, involving various quantitative approaches, optimized execution, and advanced risk management techniques, and often have low correlation with cryptocurrency prices, enabling them to capitalize on market inefficiencies in emerging asset classes, achieving higher Sharpe ratios and lower drawdowns.
Another category of active management strategies aims to outperform specific benchmarks, such as a buy-and-hold strategy for Bitcoin or a market-cap-weighted buy-and-hold strategy. These strategies typically involve certain return forecasts, market timing, and risk management frameworks. If executed properly, active management can deliver lower volatility and higher returns compared to corresponding passive strategies. Investors can access these active management strategies through fund structures or separately managed accounts in spot and futures markets. Over time, more active management ETFs are expected to emerge, providing investors with options. |
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Post time 7-5-2024 12:26:30