Portfolio management is the act of selecting and managing a set of investments in order to achieve your financial goals and risk tolerance. Understanding portfolio management will assist you in improving your long-term investing success. This applies to crypto and DeFi in the same way as it does to traditional finance, therefore the concepts are derived from TradFi but are just as vital to understand.
Portfolio Management Methodologies
There are numerous portfolio management strategies, but they can be divided into two categories: active and passive. The primary distinction between the two is the time horizon for which the portfolio manager intends to hold each investment.
Management that is active
Active management is actively buying and selling specific assets on a regular basis in order to maximize profits or minimize risks. Most people connect hedge funds with this form of portfolio management, in which the portfolio frequently changes in response to market conditions.
Management through passive means
The polar opposite of active portfolio management is passive portfolio management. It is an investment strategy that is set and forgotten. The investor often follows an index passively through the use of an index fund or buys and retains a single, often simpler portfolio for long periods of time.
Both styles are popular in the cryptocurrency industry based on the tax on cryptocurrency in India. Some traders manage their portfolios actively on a daily basis, taking profits or trimming losses based on technical and fundamental considerations, market mood, and so on. Many people, on the other hand, take a more passive approach, purchasing and holding cryptocurrencies like Bitcoin and Ethereum. If you’ve heard the term HODL (Hold On for Dear Life), you’re already familiar with passive portfolio management.
If it sounds like active management takes a lot of time, that’s because it does! Whether you choose an active cryptocurrency portfolio management method is determined not only by how much free time you have, but also by whether you have the technical expertise to invest actively and keep up with developments in the market.
Return and Risk
Before we get into the approaches for optimizing a cryptocurrency portfolio, we should recognise that while we should be concerned with an investment’s predicted returns, we should equally be concerned with its risk. We’ll go over many risk measures later in this essay, but the most crucial one to understand is volatility.
Volatility is a danger.
Volatility, also known as standard deviation (denoted by the Greek letter sigma, or σ), is a statistical measure of the degree of uncertainty in the price fluctuations of an asset. The greater the volatility, the greater the price deviation from or movement around its average value (μ). In general, this means that an asset with higher volatility is riskier because its price is more likely to fluctuate.
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