Crypto investment strategies amid economic recession

1. What is economic downturn?

An economic downturn is a situation where the economy of a country or region experiences a significant decline in both production and business activities.

This situation can arise from multiple factors such as financial crises, severe downturns in industries, wars, or the impact of unexpected black swan events in life. Furthermore, it could result from prolonged pandemics, causing gradual job losses and economic decline.

All these factors lead to currency devaluation, rising unemployment rates, and a gradual loss of confidence among financial investors.

These are the effects of economic downturns on traditional markets in general. But how does this affect the crypto market? And is an economic downturn currently unfolding? These questions will be answered in the following sections.

2. Will an economic recession occur in the near future?

According to data from VnEconomy, the prices of many basic commodities such as food, metals, and energy have collectively plummeted following a rapid surge in 2022.

Ayhan Kose, Acting Chief Economist of the World Bank, stated that global prices of basic commodities are currently trending downward. He believes that while the economy is weakening, it may avoid a recession in 2023-2024. However, if other risks to growth reduction emerge, a recession could still occur.

No one can accurately predict when an economic downturn will happen, but it is a natural part of economic cycles. Nevertheless, at the time of writing, there are significant signs indicating that an economic downturn has already begun:

• Numerous large corporations like Facebook, Microsoft, Google, Amazon, etc., have laid off tens of thousands of employees, contributing to widespread unemployment.
• Production rates in many sectors have decreased compared to the same period last year (e.g., Hanoi Beer - HABECO reported a 9% decline in beer production).
• The Fed has raised interest rates to their highest level in 22 years.

These developments suggest that an economic downturn is currently underway.

Above are just a few prominent examples showing that the global economy is entering a recessionary phase. This trend is particularly pronounced in developing countries.

Changes in the combination of factors such as political shifts, international situations, wars, pandemics, etc., can create uncertainty in the economy. The crucial point is that we need to be prepared to face an economic downturn whenever it occurs.

3. The impact of economic recession on the crypto market

Below are the impacts that an economic downturn can have on the crypto market:

• Decrease in Stablecoin Supply: In reality, the interest rates for borrowing in DeFi within the crypto market are often lower than traditional bank rates. This can lead to a significant withdrawal of stablecoins from the market, reducing their supply in the crypto market.
• Price Volatility: Economic downturns can cause price volatility in cryptocurrencies, with altcoin markets experiencing sharp declines.
• Government Attention and Regulation: Governments may implement stricter measures to control and regulate the cryptocurrency market during an economic downturn.

These factors illustrate how economic recessions can affect the dynamics and regulation of the crypto market.

In summary, the crypto market will inevitably be impacted to some extent by economic downturns. Every user needs to manage their finances wisely and cautiously to navigate the fluctuations and risks in this market.

4.What should crypto enthusiasts do during an economic recession?

When the economy falls into recession, crypto investors may consider the following actions:

• With economic downturns becoming severe, users may consider withdrawing capital or converting assets into stablecoins to safeguard their asset values from depreciating national currencies.
• Capital Allocation: One of the most critical tasks during an economic downturn is proper capital allocation. This requires careful consideration and foresight. Investors should determine a specific allocation ratio for their cryptocurrency investments and adjust the allocation of different coins in the market according to changes.In general, not all investors have the same allocation ratios. Each person should conduct their own research to find the most suitable allocation ratio. For myself, I find the following allocation ratio to be a reasonable guideline during this period:50% in safe-haven coins (such as BTC or ETH)
  15% in mid-cap coins (with market capitalizations ranging from $70M to $500M), although thorough research is necessary before investing as not all coins within this market cap range have growth potential
  30% in stablecoins like USDT, USDC to wait for opportunities and purchase coins at favorable prices
  5% in narrative-driven coins and memecoins
• Choosing safe-haven coins becomes more crucial than ever during economic downturns. Users should research and evaluate the stability of each cryptocurrency to ensure their assets are protected from significant fluctuations. In terms of safety, BTC and ETH remain top choices due to their high market capitalization and relatively stable nature.
• Monitoring global economic conditions: In conjunction with the above actions, it's essential to continuously update oneself on global economic conditions and factors that may affect the cryptocurrency market. This helps in making informed investment decisions and updating investment strategies based on the latest developments.

• Managing emotional state: Economic downturns and volatility in the crypto market can create psychological pressure. Therefore, in addition to the above actions, ensure you maintain a clear and rational mindset, and avoid making investment decisions based solely on emotions.

5. Conclusion

In summary, during an economic downturn, cryptocurrencies can emerge as a viable option for the financial strategies of many investors. However, crypto enthusiasts must allocate their capital wisely, diversify their investment portfolios, and make informed decisions when selecting coins to navigate the challenges posed by economic recessions.