3 Cryptos to Help Hedge Against a Possible Recession

Is a 2023 recession on the horizon? That's the general consensus of economic experts these days, and investors of all stripes are buckling up to face the inevitable storm.

But there's a plot twist to this downturn. Traditional stocks and bonds may struggle in the months to come, but a surprising asset class could be the answer to your wealth-guarding concerns. I'm talking about cryptocurrencies.

Yep, you heard right. The former paragons of volatility and uncertainty may actually be able to safeguard your portfolio in a downturn nowadays. Let me give you the rundown on a trio of cryptos that fit the bill, including why I think they could be an effective recession hedge.

These ain't your grandpa's recession-proof cryptos!

All right, I know Bitcoin (BTC -3.65%) and Ethereum (ETH -3.00%) are the names to beat in the crypto world. Lots of people suggest them as hedges against recessions, inflation, the common cold, and unsalted broccoli. Despite their years and years of unpredictable price changes, the biggest boys on the blockchain have earned that respect.

But if you want to diversify your portfolio and hedge against a recession, there are some lesser-known cryptos that you should consider. These are cryptos with real-world use cases that can help you make some serious dough over time, even if the economy's in a slump. And don't get me wrong -- Bitcoin and Ethereum are still legitimate options. I'm just saying that there may be even better options out there.

And that's where my top pick for a recession hedge comes in. Say hello to the mighty Polkadot (DOT -6.92%). With its unique features and killer potential, you really need to know Polkadot on this threshold of a likely recession.

1. Polkadot: The web3 wonder

Here's why Polkadot could be your secret weapon against a recession.

First off, it's more than just a simple cryptocurrency. The Polkadot ecosystem is a decentralized portal to an app developer's nirvana, where its coding platform makes it easy to take full advantage of the best qualities in many different blockchains. Polkadot helps these separate chains communicate with each other. This solves a major challenge facing the crypto industry -- interoperability.

Polkadot is still in its early stages of development but has the potential to be a significant player in the crypto sector. In time, a fully developed Polkadot system could even give the economy a boost in a downturn. Yes, I really believe that this project will reach that level of game-changing power in a few years.

Why? Well, you may know that Polkadot is part of the web3 ecosystem, the next-gen internet built on decentralized tech. But that's not the whole story. This cryptocurrency was actually created by the Web3 Foundation in order to provide exactly the type of fully functional but also decentralized techno-magic the Foundation envisions. If and when web3 disrupts the social media-era internet as we know it, Polkadot will lead the charge.

Furthermore, Polkadot has a sophisticated and decentralized governance structure that should make it more stable than other cryptos. Plus, it's developer-friendly, making it easy to build innovative applications on top of the platform. That combination points to a long and lucrative future of game-changing innovation.

That's still not the whole story. Polkadot's investor-friendly qualities are plentiful, and I expect this cryptocurrency to gain lots of value in the next few years, whether the economy gets stuck in a recession quagmire or not. This token is a direct bet on a sea change in online business methods and consumer-level financial services.

As web3 evolves, I'm pretty sure Polkadot will be worth a lot more than the scrawny $8 billion market cap it sports today. There's no such thing as a guaranteed result in the real world, of course. This one comes close, in my opinion.

2. Solana: The digital math rock drummer

Next up is Solana (SOL -7.03%), a so-called "Ethereum killer" that can process transactions and smart contracts at lightning speed. This blockchain offers a unique combination of features that could make it a serious contender in the cryptocurrency industry. I'm not saying that Solana will destroy Ethereum and steal its throne, but this crypto market is big enough to support more than one smart contracts platform -- and Solana is the best non-Ethereum alternative I've seen so far.

You see, Solana brings together a bunch of benefits that may seem incompatible with each other. Its transaction-processing system is completely decentralized, which may seem to slow things down and invite security problems. However, Solana's hybrid consensus process runs two blockchain ledgers in parallel.

The unique proof-of-history (PoH) chain keeps ultra-accurate time for the hybrid system, letting Solana's proof-of-stake (PoS) chain complete the security analysis of many pending transactions in seemingly random order. Then, the PoH system's timing signals can put the scrambled puzzle pieces together in the correct order.

It's like having a top-notch drummer in a chaotic math rock band. The rhythm may not make sense from the outside, but everything just works.

This clever setup routinely handles thousands of blockchain transactions per second (TPS), with an all-time TPS record of nearly 8,500 and a theoretical limit of around 65,000. Planned platform upgrades should soon lift that ceiling to roughly 600,000 TPS. Ethereum and Bitcoin aren't even playing in the same league, with TPS maximums of 30 and 7, respectively.

So Solana should find plenty of work to do in fields where instant processing is a top priority. High-frequency trading springs to mind, tightly followed by real-time video games and large-scale supply chain management. Don't forget that Solana runs Ethereum-compatible smart contracts on this greased-lightning platform, opening the door to a large and growing market.

Now, Solana may sound perfect, but it does have some issues. Its blockchain network experienced three multihour outages between September 2021 and April 2022, for example. Like a German sports car, there are many moving parts to this advanced technology, and any failure can bring the whole system to a standstill.

Compared to Polkadot, I'm a little bit less convinced that Solana will set up shop in the cryptocurrency sector for the long term. It can earn my trust by winning more development projects and keeping its transaction flow uninterrupted for years to come. For now, it deserves your attention as a somewhat speculative play on Ethereum alternatives.

3. Litecoin's consumer-friendly spin on Bitcoin's code

Finally, let's take a quick look at Litecoin (LTC -3.89%).

Like Bitcoin, Litecoin is a digital asset that operates outside the control of governments and financial institutions. In fact, it started out as a slightly tweaked clone of Bitcoin's technology. Here's where things get interesting: Litecoin has some key advantages that make it a potential recession hedge.

Chiefly, Litecoin's block generation rate is set up to run faster than Bitcoin's or even Ethereum's. The main idea behind Litecoin's creation was to make Bitcoin-style cryptocurrencies more useful as a day-to-day payment system. In a perfect world, you'll soon forget where you put your old-school credit cards because the Litecoin-based money-sending app on your phone does everything they used to do. Bitcoin was never meant to do that.

We're a long way away from a world full of Litecoin payments, and the Bitcoin clone could very well lose that race to other cryptocurrencies with similar design goals, but Litecoin does have a head start and should be considered a heavy favorite. And this is one of those situations where progress toward a new solution may be accelerated by recessions in the global and American economies.

Like Solana, this idea is somewhat speculative, and you might prefer grabbing some plain old Bitcoin instead. Still, I see promise in Litecoin's consumer-friendly system design, and this name deserves a second look.