Portfolio management involves selecting and managing a set of investments to achieve your financial goals and risk tolerance. Understanding portfolio management will help you improve your long-term investing success. This applies to crypto and DeFi in the same way as traditional finance, so the concepts are derived from TradFi but are just as essential to understand.
Portfolio management methodologies
There are many portfolio management strategies, but they can be divided into two categories: active and passive. The main distinction between the two is the time horizon over which the portfolio manager intends to hold each investment.
Active management actively and regularly buys and sells specific assets in order to maximize profits or minimize risk. Most people associate hedge funds with this form of portfolio management, in which the portfolio changes frequently in response to market conditions.
Management by 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 tracks an index passively using an index fund or buys and holds a single, often simpler, portfolio for long periods of time.
Both styles are popular in the cryptocurrency industry based on the cryptocurrency tax in india. Some traders actively manage their portfolios on a day-to-day basis, taking profits or cutting losses based on technical and fundamental considerations, market sentiment, and more. Many people, on the other hand, take a more passive approach, buying 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 seems like active management takes a long time, that’s because it is! Choosing an active cryptocurrency portfolio management method depends not only on how much free time you have, but also on your technical expertise to actively invest and keep up with market developments.
Return and risk
Before discussing approaches to optimizing a cryptocurrency wallet, we must recognize that while we must be concerned with the expected returns of an investment, we must also be concerned with its risk. We’ll go over many risk metrics later in this essay, but the most crucial 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 an asset’s price fluctuations. The greater the volatility, the greater the price deviation or movement around its mean value (μ). In general, this means that an asset with higher volatility is more risky because its price is more likely to fluctuate.
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