Active Management in Digital Assets: Why Passive Strategies Are Failing in a Fragmented and Volatile Market

In the rapidly evolving world of digital assets, the traditional dominance of passive investment strategies is faltering. Unlike the broader U.S. equity markets, where passive strategies have long outperformed active ones, the fragmented and volatile nature of digital assets has created a unique environment where active management is not just surviving—it is thriving. This divergence is driven by structural complexities, rapid technological innovation, and cross-market dislocations that passive strategies, designed for stability and broad exposure, cannot effectively navigate.

The Limits of Passive Strategies in Digital Assets

Passive strategies, which rely on replicating market indices or asset-weighted benchmarks, struggle in markets where prices are dictated by liquidity imbalances, regulatory arbitrage, and protocol-specific events. For instance, crypto derivatives now account for 70-80% of global trading volumes*Now is the Time for Active Management in Digital Assets*, Coindesk Indices, [https://www.coindesk.com/coindesk-indices/2025/09/17/now-is-the-time-for-active-management-in-digital-assets]^[1], creating a landscape where price discovery is decentralized and often disconnected from spot markets. Passive strategies, which typically track spot indices, miss opportunities in derivatives, structured products, and cross-asset hedging—areas where active managers excel.

Moreover, the rise of BTC/ETH-denominated funds and niche protocols has fragmented the market into silos, each with distinct risk-return profiles. Passive strategies, which assume homogeneity in asset behavior, cannot adapt to these micro-ecosystems. As a result, investors seeking broad exposure through passive vehicles often underperform relative to active managers who exploit dislocations between sectors, regions, and asset classes*Now is the Time for Active Management in Digital Assets*, Coindesk Indices, [https://www.coindesk.com/coindesk-indices/2025/09/17/now-is-the-time-for-active-management-in-digital-assets]^[1].

Active Management's Edge in a Volatile Regime

Active managers in digital assets leverage sophisticated tools to capitalize on volatility rather than fear it. By deploying tactical positioning, dynamic risk management, and protocol-specific insights, they extract alpha uncorrelated to broader price trends. For example, 63% of wealth managers surveyed in 2025 believe active strategies outperformed passive ones in the previous year, a sentiment echoed by experts like Dave Goodsell of Natixis, who argue that active management is uniquely suited to preserving assets in uncertain environments*Now is the Time for Active Management in Digital Assets*, Coindesk Indices, [https://www.coindesk.com/coindesk-indices/2025/09/17/now-is-the-time-for-active-management-in-digital-assets]^[1].

This edge is particularly evident in the context of regulatory catalysts and protocol upgrades. When Ethereum's sharding upgrade or Bitcoin's halving event created short-term dislocations, active managers swiftly adjusted portfolios to hedge risks or exploit arbitrage opportunities. In contrast, passive strategies, constrained by index rules and liquidity constraints, lagged behind.

Structural Challenges for Passive Strategies

The underperformance of passive strategies is further exacerbated by the erosion of traditional correlations. In 2025, macroeconomic divergence and crowding effects have rendered classic passive models obsolete*Why 2025 May Be the Year Active Management Faces Its Biggest…*, LinkedIn, [https://www.linkedin.com/pulse/why-2025-may-year-active-management-faces-its-biggest-thiyagarajan-ykyte]^[3]. For instance, the one-year success rate of active equity fund managers in the U.S. plummeted to 23.1% in February 2025*Active Fund Managers Lag Passives Despite Volatile Markets*, Morningstar, [https://global.morningstar.com/en-gb/funds/active-managers-lag-passives-despite-volatile-markets]^[4], a stark contrast to the 63% of wealth managers who reported active outperformance in digital assets. This discrepancy highlights how digital assets operate in a parallel universe, where volatility is not a bug but a feature.

Fixed income, a sector where active management has historically thrived, offers a parallel. In June 2025, active bond managers achieved a 50.1% one-year success rate, benefiting from currency shifts and relative value opportunities*Active Fund Managers Lag Passives Despite Volatile Markets*, Morningstar, [https://global.morningstar.com/en-gb/funds/active-managers-lag-passives-despite-volatile-markets]^[4]. Similarly, in digital assets, active managers exploit cross-protocol yield differentials and credit risk asymmetries to generate returns.

The Future of Active Management in Digital Assets

As the digital asset market matures, the role of active management will expand beyond speculative trading to include structured products, risk parity strategies, and cross-asset hedging. The rise of derivatives and institutional-grade tools has democratized access to alpha generation, enabling even smaller players to compete with traditional financial institutions.

However, this evolution demands a reimagining of active management itself. The industry is shifting from traditional mutual funds to model portfolios, direct indexing, and self-service apps*Amid The Noise, Active Management Quietly Reinvents Itself*, CFA Institute, [https://blogs.cfainstitute.org/investor/2025/05/07/amid-the-noise-active-management-quietly-reinvents-itself/]^[2], reflecting a broader trend toward adaptability and scenario-aware alpha generation. In this new paradigm, success hinges not on outperforming a benchmark but on navigating a fragmented, fast-moving ecosystem where passive strategies are increasingly obsolete.

Conclusion

Passive strategies, once the bedrock of modern finance, are ill-suited to the fragmented, volatile, and structurally complex world of digital assets. Active management, by contrast, thrives in this environment, leveraging agility, innovation, and deep market expertise to deliver uncorrelated returns. As the sector evolves, investors must recognize that the rules of traditional markets no longer apply—and that the future belongs to those who can navigate the chaos.