Setting Boundaries: Defining Active and Passive Management for Crypto

Advisors should be provided with clearer definitions of active and passive management for digital assets to make more informed portfolio choices for their clients.

Since the creation of index funds, allocating between active and passive management remains the subject of great debate among investors. Over time, the boundary lines between active and passive investment vehicles for traditional asset classes have become better defined, benefiting from decades of analysis and product development. Unfortunately, the same cannot yet be said for crypto investment products.

Advisors investing in established asset classes today are tasked less with disentangling “active” vs. “passive” and more with determining how much active risk to take on for clients, and choosing the most sensible ways to do so from an accessible, well-populated landscape of highly competitive investment vehicles.

For advisors interested in digital assets, the task is doubly challenging because “active” and “passive” investment options are still only nascently defined and starkly lacking in both sophistication and ease of access.

What does “active management” look like for crypto today? The following framework 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.

Often implemented directly via exchanges, through separately managed account platforms (SMAs), or investment trusts (especially in the absence of SEC-approved spot ETFs), buy-and-hold is the most simplistic way to add digital assets to an overall portfolio.

Pros:

Cons:

Active vs. Passive: This represents passive exposure to a subset of digital assets (commonly BTC and ETH), but without the diversification and risk-management benefits of typical rules-based passive indices.

Automated indices provide a rules-based framework for crypto exposure to a broader number of assets (often the top 10-25 assets by market cap) and systematically rebalance to meet portfolio construction goals. Currently, U.S. investors often access these products through multi-asset SMAs.

Pros:

Cons:

Active vs. Passive: While some tout the automated nature (i.e., rebalancing) of these products as “active,” 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. These are often accessed via hedge funds or specialized SMAs.

Pros:

Cons:

Active vs. Passive: 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.