Active vs. Passive Management

Why should you care about active and passive management?

The volatility of the crypto market makes understanding these different approaches even more important than with traditional investing. Your risk tolerance and investment horizon will help you determine which type of management is best for you.

There are two main approaches to managing your portfolio: passive and active. 

Passive management tries to mimic the performance of the market by investing in a group of assets that represent the overall makeup of the market or a subset of it. So when the markets go up, passively managed funds tend to rise with it; when markets decline, passive funds typically follow. Index funds are a form of passive management. This is a “set it and forget it” strategy that aims to take advantage of the general rise in value over time of markets. 

Active management, however, isn’t satisfied with the returns of the market. For these portfolios, managers often make frequent trades based on economic trends, financial analysis, predictive algorithms, and political data (and probably a few hunches) to try to beat market returns. While the rewards of active management are potentially higher, the fees—and the risks—are often higher as well. 

In a volatile asset class like crypto, passive management will lead to greater swings in the value of your portfolio as the market moves quickly up or down. Active management can mitigate some volatility, but it requires either time to manage the portfolio yourself or a knowledgeable investment advisor to do it for you.