It is a truth universally acknowledged that the economy moves in cycles. And so, it is not a matter of if a recession will happen – but when. Instead of worrying about it, you can start preparing for the next recession. Diversifying your investments in different asset classes such as fiat currency, cryptocurrency, and gold is common advice. In this article, we will compare those three asset classes and explore tokenized gold as potential safe havens for the next recession.
What Is Recession?
An economic recession happens when economic activities slow down. This is marked by a sustained downfall in the prices of goods and services due to lower demand within an economy or a specific sector. As a result, the purchasing power of money escalates, and the economy goes into deflation or negative inflation.
During this phase, the level of unemployment shoots up and wages go down. Furthermore, the economy may experience low credit and money supply, reduction in production cost, oversupply, inflation-controlling contractionary measures, increased savings, and a decline in aggregate demand.
Investing for the Next Recession
It’s always worth preparing for rainy days, including a recession. We will compare three popular assets that people invest in as financial cushion when recession happens.
Fiat Currency – not as stable as many think
Fiat currency is a monetary system with nothing of value in the currency itself; it’s just paper, cheap metal coins, or digital bits of information. It has value because the government declares it to have value, and it is legal tender to pay all things, including taxes.
The world’s reserve currency is currently the U.S. dollar. The dollar became the reserve currency when President Richard Nixon abandoned the gold standard. In 1944, the Bretton Woods agreement kickstarted the dollar into its current position, replacing the British pound sterling as the dominant currency.
The strength of the U.S. dollar is crucial. For example, a strong dollar or increase in the exchange rate is better for individuals because it makes imports cheaper and lowers inflation.
Most of the world’s currency prices fluctuate based on the supply and demand in the foreign exchange market. The stability of any currency depends on consumer confidence, the political state, and economic performance, all of which affect currency strength.
That said, fiat currency is not immune to market crashes. In 2019, a flash crash hit the fiat currency markets whereby the dollar collapsed while the Japanese yen soared.
In a recession, the central bank can lower interest rates, and the government can increase spending to stimulate the economy. However, these measures can also lead to inflation, which can erode the value of fiat currency.
Cryptocurrency – inherently diversified safe haven
Cryptocurrencies are digital assets that use cryptography to secure transactions. Just like fiat currency, traditional cryptocurrencies like Bitcoin and Ethereum are not backed by physical commodities.
However, there exist asset-backed cryptocurrencies or stablecoins that are backed by physical assets such as gold and real estate. Due to this as well as the decentralization, anonymity and accessibility aspects of cryptocurrencies, they have gained popularity as safe haven assets.
Nevertheless, it is important to note that cryptocurrencies are still in the early stages of development. The prices are highly volatile and there are risks involved such as regulatory issues. The world of crypto is infamous for scams and pump-and-dump schemes taking advantage of the anonymity and immutability of blockchain technology. Furthermore, there are still concerns over the true value of the underlying assets.
Despite these drawbacks, crypto natives are bullish on Bitcoin especially, as it was created as a response to the U.S. financial crisis in 2008. Critics argued that Bitcoin is inherently diversified as its value is not tied to a particular country and represents wealth without borders. As such, during fiat currency recession, Bitcoin may thrive and help investors protect their wealth.
Gold – tokenizing traditional safe haven
For centuries, gold has been used as a store of value due to its unique physical properties. It is easily shaped and stored even in small amounts, and it can last for a very long time. Because of its durability and malleability, gold has proven to be an excellent hedge against inflation and market volatility. As such, the demand for gold usually increases during a recession.
Investing in gold can be done in many ways, including buying the physical gold itself such as coins or bars, or investing in gold ETFs or mutual funds.
With the advent of blockchain technology, you can also invest in gold using crypto tokens. Tokenized gold refers to a cryptocurrency that is backed by gold with each token representing a share of ownership of the underlying asset. This allows anyone regardless of economic background to own a fractional or small amount of the asset.
The world’s first halal DeFi commodity exchange, TijarX is lowering the barrier to entry and promoting inclusion with the opportunity to easily invest in halal crypto gold-backed tokens. The tokenized gold on TijarX is 100% backed by fully allocated gold bullion secured in a reserved vault and is redeemable with additional fees.
Thriving in Recession
Fiat, crypto and gold all have their advantages and drawbacks. While gold seems to be the best hedge, storage and transportation can be costly and the prices can also drop depending on the market cycle.
To ensure that you thrive during a recession, it is essential to prepare well by doing your own research. With a better understanding of the strengths and weaknesses of each asset class, you may create a portfolio that is tailored to your investment goals and risk tolerance.
For example, you may want to consider diversifying the currency holdings within the same asset class or between different asset classes. Preparing for a recession may require long-term perspective so it’s recommended to consult a financial advisor before making any investment decisions.
Diversify Your Portfolio with MRHB DeFi
If you’re considering investing in halal crypto or gold, start your journey with MRHB (pronounced ‘Marhaba’). MRHB is a halal DeFi ecosystem that is helping more than 1.7 billion faith-based and unbanked communities to access decentralized financial services easily. The commodity exchange TijarX where you can invest in tokenized gold is accessible via the all-in-one Sahal Wallet app.