There's no Paul Revere in 2022 riding around yelling that a recession is coming. But some are predicting that another economic downturn is inevitable. Soaring inflation is forcing the Federal Reserve to crank interest rates up. And the economist Mohamed El-Erian thinks these rate hikes could lead to a recession.
If El-Erian is correct, the attractive options available to investors are rather limited. But there are some alternatives worth considering. Here are three cryptocurrencies that could hold up well during a recession.
Image source: Getty Images.
1. Tether
There are several key benefits of cryptocurrencies. Low volatility typically doesn't make the list. However, Tether (USDT -0.01%) stands out as a notable exception. Over the past 12 months, Tether's price has rarely fallen more than 1%, even when other cryptocurrencies were crashing.
The reason Tether's price experiences such low volatility is that it's a stablecoin. Tether's stability stems from the fact that it's pegged to the U.S. dollar.
Only Bitcoin and Ethereum have greater market caps than Tether among cryptocurrencies. It initially was built on top of the Bitcoin blockchain but later expanded to other blockchains, including Ethereum.
For many investors, buying Tether is largely a defensive play. Investing in the stablecoin during a recession, therefore, could make sense. It's also possible to lend Tether tokens to earn yields ranging from 3% up to around 20%.
However, Tether isn't without risk. There has been controversy in the past about whether or not its tokens are fully backed by U.S. dollar reserves.
2. USD Coin
You're probably not going to find a cryptocurrency with less drama than USD Coin (USDC 0.01%). Like Tether, USD Coin is a stablecoin pegged to the dollar. The price hasn't fluctuated at all since its launch in October 2018.
USD Coin has a market cap of $81.7 billion. That's enough to rank it No. 5 among all cryptocurrencies and second only to Tether among stablecoins.
The positives for Tether are generally applicable to USD Coin as well. Probably the most important differentiator for USD Coin is its reputation for transparency. The stablecoin was launched by Centre Consortium, which has two founding members: payment services company Circle and cryptocurrency exchange Coinbase. Unlike some cryptocurrency companies, both Circle and Coinbase comply with applicable regulations.
Every USD Coin in circulation is fully backed by dollar reserves or dollar-denominated assets with an equivalent fair value. All of these reserves are held in accounts maintained by financial institutions that are regulated by the U.S. government. This transparency has enabled USD Coin to gain ground on Tether over the past year.
3. TerraUSD
There's no surprise with the third cryptocurrency on our list. TerraUSD (USTC -0.30%), like Tether and USD Coin, is also a stablecoin. It ranks No. 14 among cryptocurrencies based on market cap. However, TerraUSD has been less stable than its peers over the past 12 months, with its price temporarily falling as much as 8% in May 2021.
This higher volatility stemmed from a steep decline last year for the Terra Luna token. Both cryptocurrencies are part of the broader Terra ecosystem.
However, that ecosystem offers some advantages for TerraUSD investors. Perhaps the most important one is the Anchor Protocol. The decentralized savings and lending app offers a yield on TerraUSD stablecoins of around 19.5%.
Those high yields probably won't be sustainable. Two leading crypto investment firms, Polygon and Arca, are pushing the Anchor Protocol to reduce its yields. But TerraUSD nonetheless could be an attractive port in the storm if and when a recession hits.
