The passive management strategy aims to replicate market indices such as the S&P 500 or the DJIA (Dow Jones Industrial Average).

The underlying idea behind passive management, a form of investment planning and strategy, is that it is unlikely that people will outperform the market regularly. Therefore, one should passively move with the market. The idea of a passive management strategy derives from the EMH (efficient market hypothesis), which states that current market prices contain all information and that people cannot outperform the market in the long run.

In this strategy, investors typically buy a fund or exchange-traded fund (ETF) that mirrors the performance of an index and allocate their portfolio in line with that index. In passive management, no attempt is made to actively evaluate, select or trade to determine the composition of the portfolio.

The basic idea of passive management is to try to capture the market return overall and avoid attempting to outperform the market. According to this strategy, the market is assumed to be efficient and prices are correctly valued. Therefore, investors aim to achieve a low-cost and low-risk portfolio by investing passively with an index that tracks the market.

One of the most common applications of passive management is index funds. Index funds are funds that track the performance of a specific index and provide investors with a broad allocation across various asset classes (e.g. stocks, bonds, commodities). These funds typically use a market capitalization-weighted method to mimic the weightings of the assets that make up the index.

Passive management is generally less costly than active management. In active management, higher management fees and transaction costs may be incurred as professional fund managers are actively engaged in asset selection, market timing, and trading. However, with passive management, investors can avoid these additional costs as they are limited to following the performance of the market.

Naturally, unlike an active portfolio management choice, passive investments do not depend on human judgment, which is subjective. This is because there is no attempt to generate income from market inefficiencies. Thus, passive management is not based on a specific group of financial assets. Asset management and planning are very important.

What Are the Advantages of Passive Management?

The main advantages of passive portfolio management are lower fees and operational costs. At the same time, passive management is also a low-risk strategy. In general, any passive management or investment strategy creates a long-term portfolio that tracks the movements and performance of stock market indices. Mutual funds that implement such an investment strategy are commonly associated with ETFs (exchange-traded funds).

Therefore, the success rate of an approach such as a passive management strategy depends on a very comprehensive market performance characterized by a specific index. In essence, this implies that the strategy is free of human error or emotional preferences in the selection of financial assets.

Historically, passive management strategies have outperformed active investment strategies, mainly due to their low fees. More recently, investors have become increasingly interested in passive investment strategies, especially after the financial crisis of 2008.

As a result, passive management is a low-cost investment strategy that requires low transaction activity.

What Is Passive Management Strategy in Cryptocurrencies?

As with other financial instrument markets, the passive management strategy for cryptocurrencies works in the same way. Passive management of cryptocurrencies refers to following a passive strategy when investing in cryptocurrencies. The passive management strategy in cryptocurrencies seeks to capture the overall return of the relevant cryptocurrency market. At the same time, with this passive management strategy, investors avoid active trading and speculation.

Since cryptocurrencies are highly volatile, passive management strategies are more often used for long-term investments. In a passive management strategy for cryptocurrencies, investors typically buy a crypto index fund or ETF that mirrors the performance of cryptocurrencies or cryptocurrency indices.

Crypto index funds or ETFs are typically designed to track an index. These indices reflect the performance of a specific cryptocurrency or group of cryptocurrencies. For example, a fund based on the Bitcoin index tracks the performance of Bitcoin, while a broad cryptocurrency index fund represents a combination of different assets in the crypto market.