Many have a view of cryptocurrency that it is different from the established system. Since it is being constructed as an alternative financial system, the thinking goes that it should be a safe haven from events that affect the existing structures. Unfortunately, this is not the case, at least thus far.

It is something to keep in mind as we progress through the rest of 2022. If, indeed, tough times are ahead for the general economy, people in cryptocurrency might find their life very difficult. We could be heading for another Crypto-Winter this Summer.

While nobody is sure what is going to happen, the fact that recession is on the minds of a lot of people is very telling.

Risk-On, Risk-Off

Many Bitcoin enthusiasts mistakenly think that it behaves in a manner similar to gold. This has not shown itself to be the case. In fact, when it comes to recent events, not even gold acted like we would think.

At the core of this is the risk-off trade. When people are moving to safety, it seems that everything gets hit. The markets all saw major declines in March/April 2020. Fortunately, the downturn was short lived. However, it is a powerful reminder of where investors flee.

The destination was cash, or more specifically, the USD. That is where everyone sought safety. Unfortunately, with the on-going liquidity crisis in USD, this meant there was not enough for everyone. This was especially true internationally as many took it on the lip there.

You would think cryptocurrency would be the solution to this but it was not the case. Sadly, nothing the markets did since then changes this outlook. The cryptocurrency market has moved in tandem with equities, most notably technology stock. When they had selloffs, guess what crypto did.

When risk is on the table, cryptocurrency is going to do well. When the reverse is true, red is the color that all is painted.

Hard to believe that something that was designed outside the financial system was correlate so well to what is inside said system.

However, it makes sense since the largest players, for the most part, are Wall Street firms. They operate in the same manner no matter what the asset. And to them, cryptocurrency is just another asset class.

Beware Of The Stock Market

Everyone in cryptocurrency ought to be paying attention to the stock market. If the Fed is going to take out that with their actions, then crypto will likely be wiped out too. It could be a harsh reality for all.

Of course, this also presents opportunity. What happens if some of your favorite crypto is available for half the price? Obviously, the HODLings will feel the pain yet dollar cost averaging helps to soften the blow, at least long-term.

Here is where stablecoins can enter the picture. They should retain their value, holding the peg. This means it is a safe haven. Naturally, most stablecoin mimic, in some fashion, the USD so it is not surprising that this will be the destination for safety. At least this option exists within the cryptocurrency realm.

We also need to keep in mind the hunt for yield. This can really offset the speculators nightmare of a market crash. When something is stable and earning, say, 20%, it is an ideal place to be when the entire market is collapsing.

Does this mean that equities are going to crash? Not necessarily. While the economy is probably going to suffer, one thing that could prop the equity market up is the flow of capital. Equities often dismiss fundamentals simply because the US markets are the safe haven for global money. As bad as the US can be, it is much better than fill in the blank.

For this reason, being agile is the best move. Having some money in stablecoins earning a solid yield is a great idea. As a baseline, this never hurts, especially in cryptocurrency. After that, ensure that you are earning off your spec tokens, at least in part, to offset any declines. While there will still be pain, one might be better suited when Crypto-Spring arrives.

Risk management is an important tool in the financial world. And, regardless of how people approach it, being involved in cryptocurrency means one is involved with finance.

Thus it is best to be on aware of the correlations that potentially are out there and protect oneself if need be.

Article by @taskmaster4450le

Posted Using LeoFinance ^Beta