The professionalization of cryptocurrencies is already a reality, whether it’s tokenized securities, crypto-forward financial products from the world’s largest asset managers, or platforms that enable financial advisors to directly access this emerging market.
There is a lot to learn in the cryptocurrency space, but time is limited. How do you develop an effective investment strategy for your clients? Eric Ervin, CEO of Onramp Invest, offers insights into what cryptocurrency investment models advisors can consider as client interest in cryptocurrency continues to grow. Leo Mindyuk, CEO of ML Tech, discusses active and passive investment strategies for Bitcoin and other cryptocurrencies in an "Expert Q&A."
Tip of the Iceberg: Developing a Crypto Strategy Without Inducing Burnout
My team and I have been discussing a major shift in the cryptocurrency market. Compared to a year ago, when everyone was talking directly to investors and driving them to participate in a lot of exchange operations and self-directed investments, today we are seeing more focused attempts to support professionals. Whether it is tokenized securities, crypto forward financial products from the world's largest asset managers, or platforms that support financial advisors to directly enter this emerging market, the professionalization of crypto is clearly taking shape.
This is great news for advisors. Not only does it mean clients can get broader exposure to a wide range of digital assets, it also means advisors can now launch new products in their business, grow their assets under management (AUM) by providing the services their clients want. Those firms equipped with access solutions will thrive. As we have seen with the Bitcoin ETF, there is clear investor demand for cryptocurrencies, and this has opened the door for advisors to the wider world of digital assets. However, despite the diverse demand for digital assets, the recommended allocation of cryptocurrencies in a portfolio is still only 1-6%. When 95% of your book of business is traditional market funds, how do you follow every coin or every leader in this 24/7 ever-changing market?
In traditional markets, there are professional asset managers who can manage these tasks on your behalf. Why not use the same tools to master markets you are not yet familiar with?
Applying familiar tools to unfamiliar markets
Just like in traditional markets, the use of SMAs is not meant to replace due diligence; they allow advisors to utilize well-researched strategies to maximize coverage of the best parts of the digital asset market. Let’s explore in detail how RIAs can apply this traditional tool to new asset classes:
Five Ways Asset Managers’ Crypto Strategies Benefit Advisors
- Diversification: The cryptocurrency model allows advisors to offer clients a diversified portfolio. This diversification helps reduce overall risk by spreading investments across assets with different risk profiles.
- Customization: Advisors can tailor cryptocurrency models to individual clients’ specific investment goals and risk tolerance. They can adjust the composition of the portfolio based on factors such as market conditions, client preferences, and investment strategies.
- Transparency: Many crypto asset managers provide real-time transparency into portfolio holdings and performance. This transparency helps clients track their investments and understand how their funds are being managed, which builds trust.
- Professional Management: Advisors can draw on the expertise and insights of top asset managers to make smart investment decisions on behalf of their clients.
- Time savings: Advisors don’t have to spend hours on research because asset managers provide up-to-date market insights, automated rebalancing, and thoughtful allocations, which saves a ton of time and allows advisors to focus on other important parts of their clients’ portfolios.
Making the most of this asset class for clients
We all know the cliché that “your money can work harder,” but when it comes to digital asset investing, the same holds true. Investing everything in Bitcoin is like putting all your money in one stock. Digital asset markets are subject to significant seasonality, which means that sometimes lesser-known cryptocurrencies or Altcoin can outperform Bitcoin or Ethereum. When investors don’t consider a comprehensive cryptocurrency investment strategy, they’re overlooking the potential to capitalize on the market in a meaningful way. As a professional, you can now help them make the most of these opportunities by providing access to a wider ecosystem.
Meeting needs and building expertise
It’s understandable that it’s normal to feel daunted by the amount of education required for cryptocurrency. Everyone has different needs and values. With an asset management strategy, you can tackle the market head-on and build knowledge in the process while meeting demand and keeping your company relevant. This market is constantly evolving, and industry leaders, including Onramp Invest, are committed to keeping you ahead of the curve.
Expert advice
Q: What are the main differences between active and passive cryptocurrency investment strategies? How do they affect risk and potential returns in the volatile cryptocurrency markets?
In the cryptocurrency market, just as in traditional markets, active and passive investment strategies offer two different approaches to portfolio construction and management. A passive investment strategy typically involves selecting a basket of cryptocurrencies and holding them for the long term, unaffected by short-term market fluctuations. This strategy can be implemented by purchasing a cryptocurrency ETF or holding a diversified portfolio, either through a fund or a single managed account (SMA). This strategy often involves less ongoing management, lower transaction costs, and simpler tax treatment due to the lower trading frequency. In a more volatile market environment, successful passive strategies are often able to achieve returns close to their benchmarks, for example, a Bitcoin ETF should perform very close to a long-term holding strategy, albeit with higher volatility and potentially larger drawdowns.
In contrast, actively managed cryptocurrency strategies aim to generate attractive absolute returns or outperform the market average by exploiting market inefficiencies and sophisticated risk management. Active strategies typically involve continuous market monitoring, active risk control, higher transaction costs, and higher performance and management fees paid to professional asset managers. If executed properly, active strategies can effectively mitigate the volatility and drawdowns of asset classes, thereby achieving higher risk-adjusted returns. Actively managed strategies are diverse and adaptable to different investment objectives and risk-return expectations.
In the challenging cryptocurrency markets, choosing between active and passive strategies can significantly impact an investor's investment results.
Q: What types of active investing strategies are there?
For investors, there are a variety of active management strategies with different risk and return characteristics. For example, funding rate arbitrage, basis arbitrage, statistical arbitrage, and long-short and short-term directional strategies all aim to achieve absolute returns. These strategies are usually more complex, involving multiple quantitative methods, optimized execution and advanced risk management techniques, and are generally less correlated with cryptocurrency prices. They can exploit market inefficiencies in emerging asset classes and achieve higher Sharpe ratios and lower drawdowns.
Another category of actively managed strategies aims to outperform a specific benchmark, such as a Bitcoin buy-and-hold strategy or a market-cap-weighted buy-and-hold strategy. These strategies typically include a certain return forecast, market timing, and risk management framework. If executed properly, active management can provide investors with lower volatility and higher returns than their passive counterparts. Investors can access these actively managed strategies through a fund structure or through separately managed accounts in the spot and futures markets. Over time, more actively managed ETFs are expected to emerge for investors to choose from.
