Crypto for Advisors: The Professionalization of Crypto

As an observant bystander, I’d like to share some insights from Leo Mindyuk’s enlightening discussion on Bitcoin and crypto investment strategies in Ask an Expert. Leo eloquently explained the distinction between active and passive investment approaches.

–S.M.

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The Tip of the Iceberg: Building a Crypto Strategy Without Burning Out

I’ve noticed a significant change in the crypto market lately. A year ago, it seemed like every conversation centered around investors and their constant invitation to join various exchange platforms and automated investment schemes. Now, however, the focus has shifted towards empowering professionals in the industry. This transformation is evident in several ways: the emergence of tokenized securities, crypto-aligned financial products from leading asset managers, and tools that enable financial advisors to directly engage with this burgeoning market. The professionalization of crypto is no longer a question – it’s a reality.

This is excellent news for financial advisors as it expands the range of digital assets available to their clients and provides an opportunity to introduce a new service line. By catering to clients’ demands for crypto exposure, advisors can expand their client base and increase assets under management (AUM). Firms with efficient access solutions are well-positioned to prosper. The surge in interest for Bitcoin ETFs is evidence of the strong investor appetite for crypto, paving the way for advisors to delve into the broader digital asset landscape. However, navigating the vast and dynamic world of digital assets can be daunting, especially when managing a predominantly traditional portfolio. With cryptocurrencies suggested to make up only 1-6% of a well-diversified portfolio, how are advisors expected to keep up with every coin or market trend in this non-stop market?

As an observer, I’ve noticed that in the conventional financial market, there are skilled asset managers who handle investments on your behalf using advanced tools and strategies. Why not apply the same concept to crypto? After all, the crypto market offers its own set of opportunities and challenges, and having an expert manage your digital assets could be beneficial.

Applying the tools you know to the market you don’t know (yet)

Just like in the traditional market, while SMAs are not meant to replace due diligence in practice; they allow advisors to leverage meticulously researched strategies built to cover the best parts of the digital asset market. Let’s break down how RIAs can apply this old tool to the new asset class:

5 ways crypto strategies from asset managers can be useful for advisors

Making the most of this asset class for clients

The old adage “your money isn’t earning enough for you” holds true in digital asset investing as well. While it might be tempting to put all your eggs in one basket, like Bitcoin or Ethereum, the digital asset market experiences fluctuations and seasons. Lesser-known cryptocurrencies or altcoins sometimes outperform these major players. By not adopting a comprehensive crypto investment strategy, investors miss out on harnessing the full potential of this dynamic market. As an expert, I can assist you in making the most of these opportunities by providing access to the wider digital asset ecosystem.

Meet demand and build expertise

It’s normal to find the vast education required to fully grasp the concept of cryptocurrencies intimidating. With so many options, each serving unique functions and values, it can be an overwhelming task. However, by employing asset management strategies, you can confidently enter this dynamic market and expand your knowledge base in a systematic way. This approach not only enables you to meet current demands but also ensures your firm remains competitive in the ever-evolving landscape of cryptocurrencies. At Onramp Invest, a Securitize company, we are dedicated to staying informed and keeping our clients well-versed in this growing sector.

– Eric Ervin, CEO, Onramp Invest

Ask an Expert

As an observer, I’d be happy to explain the main distinctions between actively and passively managing your crypto investments, as well as their respective implications for risk and possible rewards in the unpredictable cryptocurrency realm.

Just like in the conventional marketplace, I observe two distinct methods for constructing and overseeing a cryptocurrency investment portfolio: the active and passive approaches. While both strategies provide unique ways to engage in this burgeoning market, they differ significantly in their execution. With active investing, I actively buy and sell various cryptocurrencies based on my research and analysis of market trends and news. On the other hand, passive investors opt for a more hands-off approach by buying and holding onto a diversified portfolio of coins, aiming to mirror the performance of the overall market rather than attempting to outperform it through individual picks.

Passive crypto investment strategies involve selecting a portfolio of cryptocurrencies and holding them over a long period, regardless of short-term market fluctuations. Passive strategies can be implemented through buying an ETF or holding a diversified portfolio of cryptocurrencies, whether through the fund or an SMA structure. This approach typically requires minimal ongoing management, low transaction costs and simpler tax implications due to infrequent trading. In a successful passive strategy, the returns are generally close to the respective benchmark. For example, for a bitcoin ETF, the returns should be very close to the buy-and-hold strategy. In crypto markets, there are a lot of short-term price fluctuations, so passive strategies are typically associated with higher volatility and higher drawdowns.

Strategies for actively managing crypto involve seeking superior returns or beating the market by exploiting market inefficiencies and applying risk management techniques. This approach is linked to continuous oversight, heightened risk management, increased transaction costs, and higher fees for professional management. Successfully executed active strategies can reduce crypto’s inherent volatility, yielding better risk-adjusted returns. Various types of actively managed strategies cater to distinct investment goals and risk tolerance levels.

In the unpredictable realm of cryptocurrencies, whether an investor adopts an active or passive strategy can greatly influence their final returns.

Q. What types of active investment strategies are out there?

In the investing world, there exist various actively managed strategies offering distinct risk-reward possibilities. Certain strategies, including funding rate arbitrage, basis arbitrage, statistical arbitrage, long-short, and short-term directional strategies, focus on generating absolute returns. These strategies are characterized by their advanced quantitative approaches, intricate execution methods, and sophisticated risk management systems. While they may not closely track cryptocurrency price movements, these strategies can deliver absolute returns with superior Sharpe ratios and smaller drawdowns through the exploitation of inefficiencies within the emerging crypto asset class.

Another good example of actively managed strategies is strategies that aim to outperform the benchmark, e.g., bitcoin buy-and-hold strategy or market-cap weighted buy-and-hold strategy. Those strategies typically involve some sort of returns prediction, market-timing, and risk-management framework. If successful, an actively managed approach helps to achieve better risk-adjusted returns compared to the respective passive strategy. For example, a properly executed smart risk-managed exposure to bitcoin helps investors achieve higher returns with lower volatility than holding bitcoin ETFs.

“Investors have several options to access actively managed investment strategies, including funds and separately managed accounts. In the future, I anticipate that actively managed Exchange-Traded Funds (ETFs) will become available for investors as well.”

– Leo Mindyuk, CEO, ML Tech

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