Investing In Bitcoin
Bitcoin, also known as “BTC,” is considered the most volume-popular cryptocurrency in the world because of its longevity and credibility. Bitcoin can be a good potential investment for anyone who wants to gain direct exposure to the demand for digital currency. Despite this, it is important to keep in mind that, like any other investment, Bitcoin also has its risks and it is important to do your research before you invest. In short, Bitcoin, like many other investments, is considered high risk, high reward – meaning that the potential profit might be higher than with other investments, but on the flip side, your money is at higher risk.
Investing in Bitcoin involves many aspects that one should consider before jumping in. This article aims to discuss the two types of investing when it comes to Bitcoin, namely: active and passive investing.
As implied by its name, active investing is a hands-on, committed approach to investing and requires you to act as a portfolio manager for your financial portfolio. Active money management aims to outperform the stock market’s average returns and make the most of temporary price fluctuations. It requires a far more thorough examination and an in-depth knowledge of when to enter or exit a specific stock, bond, or asset – in this case, Bitcoin. Commonly, a portfolio manager would supervise a team of analysts who asses and consider the qualitative and quantitative factors pertaining to the market and then based on that data, make informed decisions about future market patterns and fluctuations. Active investing demands a certain level of confidence and understanding when it comes to managing your financial portfolio and Bitcoin investing.
Passive investing involves a longer approach to investing and profiting from your investment. Passive investing is a long-term strategy for acquiring wealth by buying securities that mirror the stock market indexes and holding them long-term. In the case of Bitcoin, an example of this can be seen as buying Bitcoin and HODLing. For passive Bitcoin investors, HODLing develops into an ideological perspective on the long-term potential of cryptocurrencies, blockchain technology, and the communities that have formed around them.
The Difference Between Active and Passive Investment Management
When looking at the key differences between active and passive investing, we need to look at the fundamentals that each is based on – goal, technique, and reasoning. Below we have explained each of these fundamentals in short.
The objective of active investments is to “beat the market”, in this case, the crypto market, whereas passive investments aim to track an index.
With active investing, a fund/portfolio manager selects the shares whereas, with passive investments, Bitcoin is bought according to market trends and predictions.
Passive investments are based on the concept that markets are efficient and accurately priced and that negative fluctuations eventually turn into positive fluctuations whereas active investment portfolio managers believe that markets can be inefficient, creating opportunities to buy Bitcoin at the best price.
Pros and Cons of Active Investing
Some of the main perks of active investing include:
- Flexibility – Active investment portfolio managers can buy Bitcoin whenever they feel fit and when they feel it is a good value
- Hedging – Bitcoin Hedging is a trading strategy used to reduce the downside risk of existing portfolio positions and involves the use of derivatives (such as options and futures contracts) to counteract potential losses in a specific crypto asset holding.
- Tax management – This strategy could trigger a capital gains tax, however, advisors can tailor tax management strategies to individual investors, for example by selling Bitcoin when its price drops to offset the taxes on the big winners.
Some of the disadvantages of active investing include:
- Cost – Active investing can be very expensive with transaction costs etc. when buying and selling Bitcoin back and forth regularly.
- Risk – There is a big risk involved in active investing and you need to know what you are doing to ensure financial success instead of great losses.
Passive investing has the following advantages:
- Low fees – With passive investing, you aren’t buying and selling Bitcoin back and forth which means you will have less transaction fees.
- Tax efficiency – Through HODLing, your capital gains tax for the year will not be elevated.
The downside of passive investing includes:
- Smaller returns – Passive investing can earn you a big profit, but compared to active investing, returns could be seen as lower.
- Unpredictability and patience – HODLing takes a lot of patience and you need to just trust that Bitcoin will climb significantly at some point, but there is no guarantee of what your profit could be.
Would Active or Passive Investment in Bitcoin Be Better?
There is no definitive answer to this – the benefit of investing actively or passively in Bitcoin will depend on multiple factors and will differ from person to person. The crux comes down to this – passive is sluggish, costs less money and generally generates a smaller payout at the end whereas active is fast-paced, costs more money and usually results in a larger profit.
If you are completely new to Bitcoin and the world of crypto trading, you might want to consider starting with the passive approach as you would not have the knowledge to trade actively on your own. Regardless of the form of investment, it is always important to do thorough research before entering into it.