Active versus passive investing has been a long-standing debate in traditional investment management. However, when it comes to investing in the liquid token market, we believe that active management is critical. The digital asset market is anticipated to have a fat right tail, similar to what has been observed in the stock market over decades. We believe that only a few assets will drive the majority of wealth creation in this asset class. Historically speaking, Bitcoin (BTC) has been the primary wealth creator in the asset class. Passive portfolios have underperformed BTC over most calendar years and over a multiyear, full-market cycle.
We compared BTC’s returns to passive, market-cap weighted portfolios of the top 10, 25, 50, and 100 tokens over the past five years. None of these passive portfolios were able to outperform BTC, and some of them even lost money over this period. BTC is also one of the lowest volatility digital assets. Therefore, this outperformance is impressive on a risk-adjusted basis as well.
However, it is not enough to simply hold the top assets and expect them to continue outperforming. Assets that fell out of the top ranks of the market have historically not been able to re-enter. We analyzed the annual rankings of the top digital assets by market cap. If a token fell out of the top 10 or top 100, how often were they able to re-enter? We found that there were 12 assets that fell out of the top 10 rankings, and none were able to re-establish their position in the top 10. There was more turnover in the top 100: 115 assets fell out of the ranking, and only 12, or 10%, were able to re-enter. This analysis suggests that value investing in digital assets may be challenging.
Therefore, we believe that if you’re going to invest in digital asset markets, it’s best to either buy and HODL BTC or use active management to outperform by finding the tokens that have the fundamental momentum and potential to rise into the top ranks of the market. Value investing in digital assets may be challenging as assets that have fallen out of favor and may look cheap relative to others have historically had a difficult time outpacing the market to re-establish their highly ranked position. Contact us for more research on the case for active management in crypto.