Can Crypto Help You Get Through a Recession?
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Possibly — but it’s not something you want to bet on.
Important points
- Economic conditions may decline in the wake of rising interest rates.
- While your investments can be a source of cash during a recession, there is a better way to protect yourself.
Is a recession coming? It is certainly easy to make that argument.
Inflation has been causing consumers a world of financial strain for months, and now the Federal Reserve is trying to do something about it. The Fed has regularly raised interest rates since the start of the year, and the last two rate hikes were quite aggressive.
The reason why the Fed is going this way is that it hopes to stimulate a decline in consumption. And if it makes it more expensive to borrow, it probably will.
As consumers begin to spend less, that should narrow the gap between supply and demand. And that should in turn drive the cost of living down.
But achieving the ideal balance is difficult. And what could happen is that consumers end up cutting their spending drastically, spurring a recession and a period of widespread unemployment.
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But should crypto really be your backup plan during a recession? Or is there a better way to go?
You will not fall back on your investments
The value of your investments – whether they are digital currencies or stocks you hold in a brokerage account – can fluctuate at any time. And during a recession, your investments certainly have the potential to plummet. Therefore, relying on crypto as a source of cash to get you through a recession is not a good idea.
Say your crypto portfolio is worth $5,000 when a recession hits and then you lose your job a few weeks later. At that point, you may need a few thousand dollars to pay your bills while you wait for unemployment benefits to start. But if your crypto holdings are only worth $3,000 at the time, you risk locking in permanent losses by tapping that investment, rather than sitting tight and waiting for it to recover.
That’s why it’s generally not a good idea to plan to cash out investments when emergencies occur. Keeping separate cash reserves in the bank is a much safer bet, because your principal is protected there. Put $5,000 into a savings account and leave it alone, and you’re guaranteed to have $5,000 at your disposal when the need for cash arises.
Is your emergency fund solid?
As a general rule, it is a good idea to have enough money in an emergency fund to cover at least three months of living expenses. If you’re not there yet, stop pumping extra money into crypto and instead work on increasing your cash reserves — because it is the money you should plan to access if you lose your job and need help paying bills.
We don’t know for sure that we’re in a recession, and if a downturn hits, it could end up being mild. But don’t take the risk of locking in losses in your investment portfolio by looking to crypto as a backup plan. Instead, tap into your savings and use that money as a good resource if you fall victim to a layoff.
