Digital assets: From passive investments to active strategies

By employing tools like staking, lending, and yield-generating derivatives, investors can unlock new dimensions of portfolio performance. These approaches not only generate consistent yield but also enhance risk-adjusted returns while maintaining exposure to the broader market's growth potential.

To gain a deeper understanding of these strategies, watch the recording of our recent webinar, and read our report 'From holding to earning: Make your digital assets work for you', where we explore how to capitalize on the earning of digital assets through structured, professional-grade approaches.

Strategic allocation for long-term success

In the volatile world of digital assets, timing the market can be a tempting but risky endeavor. Historical data reveals that missing even a handful of the market’s best-performing days can drastically reduce returns. The charts below highlight just how crucial it is to remain invested in both Bitcoin (BTC) and Ethereum (ETH), the two most widely traded digital assets.  

For example, for BTC, from January 1st, 2020 to December 31, 2024:
• Missing the top 5 trading days would reduce Bitcoin’s annualized returns from 66.7% to 44.5%.
• Missing the top 25 days would result in a negative return of -2.7%.

ETH tells a similar story:
• Missing the top 5 days reduces annualized returns from 91.7% to 55.7%
• Missing the top 25 days results in a -5.9% annualized loss.

Impact of missing top days on BTC performance

Historical performance in USD*

Annualized returns - Missing top performing days*

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Impact of missing top days on ETH performance

Historical performance in USD*

Annualized returns - Missing top performing days*

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What’s particularly interesting is how these volatile surges occur unpredictably. Even in a bear market or during extended periods of stagnation, a single piece of positive news can trigger a sharp, upward movement in price. This is where option strategies prove their value. By employing strategies such as selling puts or calls, investors can continue holding the asset while earning premiums, ensuring they maintain exposure without having to worry about perfectly timing the market.

In conclusion, the crypto market’s inherent volatility makes long-term commitment essential for success. Instead of attempting to time the market, investors should focus on strategies that maximize returns while keeping them consistently engaged. The next section explores accumulation techniques designed to help investors earn returns without needing to predict the market’s next move.

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Moving beyond passive holdings

The traditional "buy and hold" strategy may serve as a foundation for many portfolios, but it often leaves significant value unrealized. As the digital asset market matures, it increasingly offers parallels to traditional finance, where investors can generate income alongside capital gains. Today’s strategies allow investors to harness the inherent volatility, liquidity, and technological innovation of digital assets to generate yield and optimize portfolio outcomes. Here’s how:

How it works: In Proof of Stake (PoS) networks, staking involves locking digital assets to validate blockchain transactions, earning rewards in return. 
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• ‍Benefits: Predictable returns (5–10%), network security, low involvement.‍
• Considerations: Asset illiquidity, market risk, and potential penalties for validator errors.‍
• Traditional parallel: Comparable to bond-like instruments such as Floating Rate Notes

How it works: Lending strategies involve supplying liquidity to borrowers through centralized or decentralized platforms, offering competitive yields while retaining asset custody. 


• ‍Benefits: Higher yields, borrowers collateral, mitigating default risks‍
• Considerations: Platform security, rehypothecation risks, and dependency on well-audited systems‍
• Traditional parallel: Comparable to high-yield bonds or private lending

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Option strategies in the digital asset space offer investors a powerful dual benefit: the ability to generate yield while strategically accumulating assets at favorable prices. These approaches, centered on selling put and call options on cryptocurrencies like Bitcoin or Ethereum, provide a structured way to earn income and manage market exposure. For long-term holders who believe in the asset class, option strategies are particularly attractive, allowing for increased exposure without the need for constant market monitoring.

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How it works



Selling Put Options:


Investors earn premiums by selling put options, which obligate them to buy the underlying asset at a predetermined strike price if the market price falls below that level. This allows investors to accumulate assets during pullbacks at prices they find attractive. If the price remains above the strike, they keep the premium as income without purchasing the asset.


Selling Call Options:


By selling call options, investors earn yield while obligating themselves to sell the asset at a higher strike price if the market rises above it. If the strike price is exceeded, they sell at a profit and keep the premium. If not, the option expires worthless, and they retain both the premium and the asset, effectively managing exposure during rallies.

Key benefits

• Full asset custody: Unlike staking or lending, option strategies allow investors to retain control over their assets. This minimizes counterparty risk and ensures flexibility in managing holdings.
• Flexibility in risk management: Options provide a way to adjust risk exposure dynamically. Investors can set strike prices to align with market expectations, balancing yield generation with the potential to acquire or sell assets at desired levels.
• Capitalizing on volatility: During periods of high market turbulence, option premiums rise, increasing the potential yield for investors. This allows them to turn volatility into an advantage while staying invested.
• Lower risk than high-leverage products: Compared to perpetual swaps or other leveraged instruments, options are less risky, providing a more controlled approach to market participation.

Considerations

• For put sellers, the primary risk is being obligated to buy the asset during sharp price declines, potentially acquiring holdings that may depreciate further in the short term.
• For call sellers, the risk lies in missing additional gains if the asset price surges significantly beyond the strike price.
• Successful execution requires careful management of strike prices, expiration dates, and overall portfolio exposure to mitigate these risks effectively.

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A case in point: The Diamond Hands strategy

Diamond Hands is an actively managed options strategy designed to accumulate additional Bitcoin at favorable price levels while generating consistent yield.

By leveraging an accumulation-focused approach, this strategy uses existing BTC holdings to sell options, earning premiums that enhance yield while positioning to acquire more Bitcoin during market pullbacks. This dual-purpose approach allows investors to grow their BTC holdings strategically, aligning with long-term accumulation goals.

Beyond generating yield, the strategy improves both absolute and risk-adjusted returns in USD terms by increasing Bitcoin holdings over time, capitalizing on market volatility to secure assets at advantageous prices.

Key performance metrics (since Jan-2019, net of fees)*

Past 12 months performance: DH BTC vs BTC*

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Fund performance metrics (net of fees)*

Simulated performance

Note: Official NAVs are based on the last closing prices on the Valuation Day. *) Performance numbers up until Dec-23 (inclusive) are simulated numbers net of fees. There is no guarantee that market conditions during the past period will be present in the future.

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Impact to passive BTC exposure - key metrics (since Jan-2019)**

Historical exposure in USD vs Passive BTC exposure**

Performance metrics based on monthly returns. Calculations involving data points prior to inception are based on simulated numbers net of fees. Source: Google Finance, S&P and company data. *) P&L Contribution analysis for indicative purposes only. Option contributions reflect total payout of the position (i.e., premium received/paid and final payout). **) Performance numbers up until Dec-23 (inclusive) are simulated numbers net of fees. There is no guarantee that market conditions during the past period will be present in the future. ***) Adjusted Maximum Drawdown represents the reduction in drawdown experienced when investing BTC holdings in DH BTC, compared to simply holding BTC passively.

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Download the Diamond Hands factsheets (BTC and ETH) to discover how this strategy can help you optimize your Bitcoin holdings and reach your investment goals.