Could Crypto Help You Get Through a Recession?

Possibly -- but it's not something you want to bank on.

Is a recession headed our way? It's certainly easy to make that argument.

Inflation has been causing consumers a world of financial strain for months on end, and now the Federal Reserve is trying to do something about it. The Fed has been steadily raising interest rates since the start of the year, and its two most recent rate hikes were quite aggressive.

The reason the Fed is going this route is that it hopes to spur a decline in consumer spending. And if it makes borrowing more expensive, that's likely to happen.

Once consumers start to spend less, it should narrow the divide between supply and demand. And that should, in turn, drive the cost of living downward.

But achieving that ideal balance is tough. And what may happen is that consumers end up cutting their spending to a drastic degree, thereby spurring a recession and a period of widespread unemployment.

If that's something you're worried about, you're in good company. But you may be less worried if you have an investment portfolio that's loaded with crypto.

But should crypto really be your backup plan during a recession? Or is there a better way to go?

You don't want to fall back on your investments

The value of your investments -- whether it's digital currencies or stocks you hold in a brokerage account -- can fluctuate at any time. And during a recession, your investments certainly have the potential to plunge. That's why relying on crypto as a cash source to get you through a recession isn't a great idea.

Say your crypto portfolio is worth $5,000 when a recession hits, and then you lose your job a few weeks later. At that point, you might need a few thousand dollars to pay your bills while you wait for unemployment benefits to kick. But if your crypto holdings are only worth $3,000 at that time, you'll risk locking in permanent losses by tapping that investment, rather than sitting tight and waiting for it to recover.

That's why it's generally not a good idea to plan on cashing out investments when emergencies strike. Having separate cash reserves in the bank is a much safer bet, because your principal there is protected. Put $5,000 into a savings account and leave it alone, and you're guaranteed to have $5,000 at your disposal when a need for cash arises.

Is your emergency fund solid?

As a general rule, it's wise to have enough money in an emergency fund to cover at least three months of living costs. If you're not there yet, stop pumping extra money into crypto and instead work on boosting your cash reserves -- because that's the money you should plan to access if you lose your job and need help paying bills.

We don't know for certain that we're in for a recession, and if a downturn hits, it could end up being mild. But don't take the risk of locking in losses in your investment portfolio by looking to crypto as your backup plan. Instead, pad your savings and use that money as your go-to source if you fall victim to a layoff.