As the world seems to be in continuous economic turmoil, crypto investors are taking the toll. It has become more difficult to build long-term resilience, let alone make short-term investments to take advantage of price changes. Therefore, to keep going through the crypto market, you need to prepare yourself for the worst and make sure you’re building a safety net for when the economy struggles again.
That’s because when the global finances are in shambles due to the high living costs and government liabilities, cryptocurrency will also slow down since more and more investors will focus on more stable assets. If we look at the leading coins, expectations for the most recent Bitcoin price prediction may include, besides value projections, federal and governmental decisions that can interfere with the market’s rise, such as upcoming inflation reports.
So, let’s see what you can do to protect your crypto portfolio investments.
Focus on high-liquidity cryptocurrency assets
High liquidity is important in cryptocurrency as it is for other asset classes, such as stocks. When we say a coin has high liquidity, it means you can buy or sell it fast without facing the effects of price changes. Therefore, you benefit from features like fewer dramatic crashes when the market value fluctuates, lower fees when you enter or exit a position, as well as an easy cash-out.
Some of the cryptocurrencies that are highly liquid include Bitcoin, with the biggest market capitalization, as well as Ethereum, which is second by market cap. Similarly, altcoins like ETH that fall into this category include Solana or XRP. Stablecoins are also highly liquid since they are pegged to fiat money like the US dollar, such as USDT or USDC. Allocating more resources into a high-liquidity portfolio can help you navigate tough times.
Avert your attention from leverage or margin trading
Trading cryptocurrency with leverage or margin has been a useful method for individuals to multiply their funds while using collateral in the past. Basically, leverage allows you to borrow funds and expand your position, exceeding your capital capacity, to boost potential profits. The margin, on the other hand, is the initial deposit needed to open the position.
The problem with leverage and margin trading now is that they can be risky, considering that difficult economic and political events can lead to emotional decision-making. When prices swing considerably, you may panic and make mistakes. But the biggest issue is liquidation risk, because when prices are dropping dramatically, losses also intensify. For example, when you’re trading with 10x leverage, you are buying the cryptocurrency with 10% of your own funds while the remaining 90% comes from the exchange, so in a scenario where the market drops, your position might be closed.
Utilize strategies like DCA
DCA (dollar-cost averaging) is one of the most popular investment strategies as it offers you as an investor more stability. DCA works in simple steps: you schedule a day of the week or month for an automated investment in crypto, which will be the same amount of funds regardless of the price of the asset. This makes it easy to even out the average purchase price, as well as avoid the emotional part of investing.
Moreover, DCA lowers the volatility impact on your portfolio by preventing your funds from being affected by short-term price swings. However, the strategy doesn’t guarantee success at all times, since it may lead to your portfolio underperforming when markets are rising in value, and there’s also no guaranteed profit. However, it may be helpful to prevent losses, which is most important during an event like a recession.
Prioritize personal financial hygiene
Financial hygiene is a term that encompasses all the good practices that contribute to a balanced financial condition. As a cryptocurrency investor, having high standards for your finances means less stress, as you may be able to better manage unforeseen circumstances and worry less about being able to secure your investments.
For example, you could start by saving up for an emergency fund in which you allocate about 3-6 months of fixed expenses, so you’re never exposed to financial uncertainty if the market falls and your investments are affected. Create monthly budgets in a simple sheet or use an app to enter income, expenses, and investments, so you can visualize your actual financial capabilities and be able to adjust where needed. Basically, what you need is to be more aware of what you want to do, which is invest in cryptocurrency, and what you need to do more than survive, which is build discipline in how you spend and save money.
Avoid high-risk crypto categories
Finally, the biggest mistake you can make as an investor when either your country (or the entire world) is going through a period of financial instability is to invest in high-risk cryptocurrencies. If safer crypto assets have high liquidity levels, the riskier ones have low liquidity, which hinders the ease with which you can buy or sell them.
When a crypto coin has low liquidity, it means it has low trading volume and few participants interested in it, so it comes with risks of slippage, volatility in price, and even manipulation in some cases. The latter issue is possible as low-liquidity coins have been targeted for pump-and-dump schemes, where interested users invest in the coin during its Initial Coin Offering, after which scammers close the project and leave investors with useless coins in their portfolios. These can be meme coins, but not necessarily, since Dogecoin, the biggest meme coin by market capitalization, has established its position as a more stable asset than other dog-related cryptocurrencies.
Conclusion
While some investors fear cryptocurrency during times of potential recession, it is not necessarily a bad addition to your portfolio. You can safely add and manage crypto by locking in only high-liquidity assets that can be easily bought and sold, as well as build a stable financial support and use appropriate trading strategies to minimize losses. What you should not do, on the other hand, is rely heavily on leverage and cryptocurrencies with low liquidity, which can increase the chances of losses.