May 3, 2023 Recession is a word that has been widely used over the past few years. By now, most, if not everyone, even those who are not involved in the world of investing and trading, is aware of this word and its meaning.
In reality, no one truly knows what the future holds in store, especially when it comes to the financial markets and state of economic well-being. However, as the savvy and intelligent investor that you are, preparing for the various possible market conditions that lay ahead, is always wise, especially as cryptocurrency investors.
This article will cover cryptocurrency investment ideas to consider when preparing for a possible recession. Remember, none of this is investment advice, but rather tips to consider.
First and foremost, having a plan is perhaps the most vital key to being a successful investor, and not just when it comes to cryptocurrency. This applies to not only investing in a recession but also a thriving bull market as well.
A solid plan consists of factors such as, how much you intend on investing, how frequently, and when you plan on exiting those investments. Failing to have one is like starting on a journey without having a map or any directions to follow.
Taking the time to create an investment plan may also lead to helping you identify different methods and strategies that you may have otherwise not thought of. Think of it as a brainstorming session – which we all know can lead to creating powerful ideas.
Another thing to remember about having a plan is that it doesn’t necessarily have to be followed to the exact. Instead, it can be altered as you go and as you see fit in comparison to the ever-changing market conditions. Again, it is a tool that is meant to help provide some guidance and direction to help best prepare you for certain situations that could otherwise catch you off-guard.
Now that you have a plan in place, it’s time to start jumping into the more technical details.
Investing and trading in the financial markets largely come down to psychology. That large majority will say that investing and trading breaks down to be around 80% psychological, and some argue it’s even more than that depending on whom you ask.
In a bull market, when the economy is thriving and the green candle sticks on the chart keep “printing”, the overall investor “sentiment” or attitude is cheerful, happy, and in some cases, pure bliss and euphoria. On the other end of the spectrum, during a recession, the feelings and attitudes of investors can be the direct opposite.
In a bull run, traders are buying with the expectations that their positions will continue to rise, even if there are dips or retracements. In their minds, those retracements are temporary. The large belief, in most minds, is that “this will keep going up forever!.” Although everyone knows that is not possible, again, a sense of euphoria takes over and those believers will commonly step in to continue to buy the dip.
The charts are usually filled with a sea of green candle sticks with limited red candle sticks appearing in between them. Bollinger bands, a technical indicator, tend to be widening and move further away from each other the higher price action goes.
The RSI, or relative strength index, also tends to be running up as well. The “normal” range for an RSI falls between the levels of 30 to 70. Anything under 30 is said to be oversold, and anything over 70 is said to be overbought. When something is oversold, investors expect a relief rally up, while when an asset is overbought, investors expect a price correction back down. During a bull market, the RSI can easily (and usually does) exceed levels over 70.
Most who are active in this phase are hoping for pullbacks in price so that they can acquire more of their favorite tokens. The mistake often made, is that these buyers do not set a price exit – again where having a plan would come in to help.
During a recession, everything above applies but in the opposite direction. The sentiment, while not necessarily negative, is nowhere as optimistic or euphoric as it is during bull markets. Most times, upon price “pumps” traders, look to exit their positions that they purchased at the bottom of a previous price decline.
A quick takeaway: Just because sentiment is low or not as positive during a recession, remember the golden quote by the multi-billionaire and perhaps the most famous investor of all time, Warrant Buffet when he says “Be fearful when others are greedy, and greedy when others are fearful.”
In times of a recession, fear is the leading emotion as people usually think of the worse which usually leads to unrealistic thoughts of “what if everything goes to zero.”
Fear also happens to be one of the strongest emotions of all. However, as history shows, economies and markets do indeed recover from recessions. Some may last longer than others, but another fact to consider is that the most wealth is amassed during times of economic turmoil and downfall – recessions.
RSI levels may fall below 30, and perhaps even further, but this tends to be the exact time when buyers step in to accumulate as they intend that a strong rebound to the upside is soon to come.
On the chart, a sharp or large red candle stick pattern commonly coincides with the falling RSI; but this is when the aforementioned “relief rally” usually follows shortly after.
A relief rally is common in bear markets or recessions. It’s when a cryptocurrency price falls for an extended period, and then buyers step in and push the price back up sharply attracting the attention of other investors. If enough attention is gained, this could very well spark a mini-bull rally until resistance levels are met.
One of the many positives of the cryptocurrency sector (among many other things) is the diverse range of coins and even “niches” within the niche that it offers.
This is where you should also reconsider investing vs. trading cryptocurrencies, especially if you are not an experienced trader, or perhaps even traded during a recession. Again, even with that said, as long as you believe in the future of cryptocurrencies, most price levels during these times are the same ones that make investors say in the future “I wish I would have bought more at that time.”
When it comes to diversifying into a different types of coins, you may look at the different sectors within the cryptocurrency market. There are “blue chip” coins, like the ones that you commonly find in the top 10 or even 20 list of market cap. Then there are the more speculative ones that are still waiting to bring actual products to the market or are just not well known.
Usually, the ones found higher up on the market cap list, are also the ones that have been around for years and have a strong following in the millions or multi-millions – meaning they are more likely to be around and rebound strongly during the end of a recession.
Coins that pay dividends or allow you to “stake” them are also great options to diversify your portfolio – and not just in a bear market.
Every cryptocurrency Is a bit different, but for the ones that support staking, you can lock your tokens away (some have specific times you have to keep them locked for, while others allow you to unlock them at any time) and receive a small percentage of tokens back as a reward for doing so.
Think of this as a dividend payment or periodic reward. Most who participated in this activity do it with coins they are very optimistic about in regards to its development and future price action and longevity as a project. In their eyes, they don’t care if the price falls, because they are receiving more coins that will be worth more in the future. To them, it’s a win-win.
For example, imagine buying Apple stock years ago for $1. Now, for every stock you owned, you received a 10% reward every 6 months ($0.10 worth of Apple stock) or 20% ($0.20) of Apple stock a year.
While that may not seem like much at the time, Apple reached nearly $200 at its all-time high, meaning that 20%, or $0.20, would have turned into $40 just from the dividends alone.
This method, staking, provides the same scenario (not in percentages as again, every coin Is different) and is also what makes it so appealing to those who believe in the future of the coin.
“Stablecoins” or coins that are pegged to the value of the dollar 1 for 1, meaning they are usually worth $1 and seldomly deviate from that price, are highly sought-after options during these times for their stability – hence the name “stable.”
They are seen as a haven for investors during times of market uncertainty, so they act as a double benefit; at least for the ones that offer to stake.
Elaborating on the different subsectors; there are layer-one coins, which are the “foundational” coins upon which other projects or Layer 2 coins are built. Layer-one or L1 coins, usually perform better than the coins or projects built upon them because they support an entire ecosystem, or at the very base level, provide a utility.
While some layer two coins (or L2) do provide utility unless they are strongly established and well known, tend to experience a bit more volatility than their parent or L1 coin. Ironically, these are the exact coins that usually experience more upside and gains during bull markets – the ones you hear about gaining thousands of percent.
Diversifying not only your portfolio, but the tools you use as well, can lead to massive success while investing during a recession. Sometimes, it’s best to step completely away from technology and trading and reset, and tools such as automated trading bots can be the perfect solution to this.
Automated trading bots can be the perfect solution for investors of all backgrounds and experience levels or lack thereof. These bots can trade all day long, 24/7 with minimum to no oversight needed. Of course, it’s always wise to check in on your investments, whether that be through random times of the day, or perhaps even scheduled times.
When you combine automated trading bots with a strategy called copy trading; this is how you can take things to the next level. Copy trading is when one trader copies the trades of another trader (usually one who is very experienced and has a proven track record) to benefit from their success.
Among the many benefits copy trading presents, having the peace of mind of knowing that you are essentially having a professional trade for you, is perhaps one of the top incentives. The trader you are copying is trading for their account, so they are truly incentivized to do well, meaning there is a level of safety and trust knowing they also have your best interest in mind as well. The better you do, the better they do.
Other tools that are often overlooked are alerts which can be sent to your email and even phone in some cases. You can set alerts to go off when certain price targets are met which may indicate a selling or buying opportunity.
Portfolio trackers are also a very valuable tool that you can enable alerts on as well. These are a great way for you to keep an account of your profit and losses as well as past performance.
Throughout all of this, everything starts with having a plan. When you start there, everything else becomes clear and should a recession occur, you will be different from the other 99% of investors who scramble and make rash decisions based on emotions.
Emotions are the one factor that you want to leave out of the equation when it comes to investing and trading, especially during a recession. All the points discussed earlier can be great additions to your plan, and truly help you navigate even the deepest of recessions.
Remember, due diligence is a must and there is no better time to take action than now. The goal is to be proactive, not reactive.
A reactive mindset and outlook are what land most investors and traders in a position (no pun intended) that they’d rather not be in.
Lastly, as psychological as investing is, the main achievement is to be and do differently than others – and this includes investing in a recession. You will see news headlines calling for the end of the world; spreading fear uncertainty and doubt; but cooler heads will prevail, as always.
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