When people talk about economic recession, they often think of a decline in economic activity in a country or region. Typical signs include falling production, rising unemployment and reduced cash flows into the financial system. This can affect many aspects of life, from personal income to the financial market in general and the crypto market in particular.
1. What is an economic recession?
Economic recession is a situation in which the economy of a certain country or region has a sharp decline in production and business activities.
This trait can come from many causes such as a financial crisis, a severe decline in industry, war or the impact of a certain black swan event that takes place in life. In addition, this could be a consequence of a prolonged epidemic, causing people to gradually lose their jobs and the economy to decline.
All of the above causes lead to a decrease in the value of money, an increase in unemployment and gradually cause loss of confidence from financial investors.
The above are the effects of the recession on the traditional market in general, but what about the crypto market? And is an economic recession happening? All are answered in the following sections.
2. Will an economic recession occur in the near future?
According to data from VnEconomy newspaper, prices of many basic commodities such as food, metals and energy have simultaneously plummeted after rapid growth in 2022.
Ayhan Kose - deputy chief economist of the World Bank (WB) said that basic commodity prices around the world are in a downward trend. He believes that although the economy is weakening, it will avoid recession in 2023-2024. But in case other growth downside risks emerge, a recession could still occur.
No one can predict exactly when a recession will occur, but it is a natural part of the economic cycle. However, as of the time of writing, we can feel many signs that an economic recession has been occurring, such as:
A series of large corporations fired tens of thousands of employees such as Facebook, Microsoft, Google, Amazon,... causing mass unemployment.
The production rate of many industries decreased compared to the same period last year (Hanoi-Thanh Hoa Beer Joint Stock Company had a 9% decrease in beer production rate...).
The Fed raised interest rates to the highest in the past 22 years.
Above are just a few prominent evidences showing that the economy has been entering a global recession. And the countries with the most obvious manifestations are developing countries.
Variations in the combination of factors such as changes in politics, international situations, wars, epidemics, etc. can create uncertainty in the economy. It is important that we are prepared to face an economic downturn no matter when it occurs.
3. Impact of economic recession on the crypto market?
Here are the impacts that an economic recession could have on the crypto market:
Decline in stablecoins: In fact, lending interest rates in the crypto market's DeFi market are smaller than interest rates in traditional banks. This led to a large withdrawal of stable coins, causing the amount of stablecoins in the crypto market to decline.
Price fluctuations: Economic recession can cause price fluctuations in cryptocurrencies, with the altcoin market plummeting.
Government and regulatory interest: Governments may take measures to control and regulate the cryptocurrency market more tightly during a recession.
In short, the crypto market will more or less be affected by the economic recession. Each user needs to manage their finances intelligently and cautiously to cope with fluctuations and risks in this market.
4. What should crypto players do if the economy is in recession?
When the economy falls into recession, crypto investors can refer to the following:
Withdrawal and asset conversion: In case the economic downturn becomes severe, users may consider withdrawing capital or converting assets to a stable cryptocurrency to protect asset value from the National currencies decline in value.
Capital allocation:One of the most important things to do is allocate capital properly during a recession. This requires consideration and insight. Investors should determine a certain proportion of assets invested in cryptocurrencies as well as the appropriate allocation ratio of coins in the market and maintain monitoring of changes in the market.
In general, not all investors have the same capital allocation ratio. Each person should do their own research to find the most suitable ratio. For me personally, I find the following ratio may be a worth reference ratio during this period:
50% for safe coins (BTC or ETH)
15% for mid cap coins (with capitalization from $70M - $500M), however, you need to research carefully before investing, not all coins in this capitalization range have growth potential.
30% are stable currencies like USDT, USDC to wait for opportunities and buy coins at good prices
5% for market narratives and memecoinsSafe coin selection: In a recession, coin selection becomes more important than ever. Users need to research and review the stability of each cryptocurrency to ensure their assets are protected from major fluctuations. In terms of the safest level, BTC and ETH are still the top two choices because these are the two currencies with the highest market capitalization and do not have too much volatility.
Monitor the global economic situation: Combined with the above activities, please continuously update the global economic situation and factors that may affect the cryptocurrency market. This helps you make smart decisions and update your investment strategy according to the latest situation.
Manage your mental state: Economic downturns and volatility in the cryptocurrency market can create mental pressure. Therefore, in addition to the above, make sure you have a clear mindset and do not make investment decisions based on emotions.
In short, during an economic downturn, crypto asset management requires consideration, clear thinking, and a very careful investment strategy. Make sure you really understand the market and make decisions based on thorough information and fundamental and technical research (if any) and always maintain a long-term perspective; Do not invest according to others fomo and absolutely do not borrow money to invest.
5. Conclusion
In short, during an economic recession, cryptocurrencies can become an option for many investors' personal financial investment strategies. However, crypto players need to properly allocate capital, create a diverse investment portfolio, and choose coins wisely to face the challenges of economic downturns.
Please note that research in cryptocurrency investing is extremely important to protect asset value in any situation. Mastering financial strategies and staying alert in asset management will help crypto investors overcome the challenges of economic downturns more easily.
