Basics
Pro Tips
How Economic Instability Affects You and Your Investments
Mar 9, 2025
Consider this: you’re sitting at your kitchen table, sifting through the bills that have piled up since you lost your job last month. You think back to the reports about the economy that were all over the news before your layoff. You glance at the latest headlines. The economy is in turmoil, and it’s not just affecting businesses—its impact is trickling down to everyday people like you.
You’re anxious to find a new job, but you can’t shake the feeling that the position you’ll see will pay less than what you made before. Unfortunately, you’re probably correct. Economic instability can result in lower wages for many workers as companies tighten their belts to survive harsh financial conditions. This guide will help you understand how economic instability can affect you so you can prepare for the next downturn that inevitably comes around.
One way to prepare is to stay informed about the state of the economy and upcoming changes that may affect your finances. This is where goomoon’s AI-powered economic interdependence calendar can help. Our tool breaks down complex economic reports into digestible insights that help you understand what’s happening in the economy and how it may affect you and your investments.
Table of content
What is Economic Instability?
Economic instability occurs when an economy experiences rapid and unpredictable fluctuations in growth, inflation, interest rates, or employment levels, leading to uncertainty in financial markets. It can be triggered by several factors, including:
Financial Crises
Bank collapses, debt defaults, or stock market crashes (e.g., 2008 Financial Crisis).
Inflation & Hyperinflation
When prices rise uncontrollably, purchasing power is reduced (e.g., Turkey’s hyperinflation in 2021).
Recessions
A prolonged decline in economic activity, GDP, and employment levels.
Geopolitical Tensions
Wars, trade conflicts, and political instability that disrupt financial markets (e.g., Russia- Ukraine War).
Central Bank Policies
Sudden interest rate hikes or monetary policy shifts that impact currency value.
Economic instability directly affects forex and crypto markets by increasing volatility, shifting investor sentiment, and causing traders to move funds between asset classes (safe-haven assets, fiat, crypto, etc.).
Key Indicators That Signal Economic Instability
To identify periods of economic instability, traders must track macroeconomic indicators that show whether an economy is in trouble. These indicators help traders anticipate potential market movements in forex and crypto.
1. GDP Growth & Recessions
GDP (Gross Domestic Product) measures the total value of goods and services produced in a country. A declining GDP signals economic slowdown or recession. Recessions occur when an economy experiences negative GDP growth for two consecutive quarters.
How it impacts trading
A weak economy leads to lower consumer spending and declining stock markets.
Forex traders see currencies of weaker economies depreciate.
Crypto traders may see increased volatility as investors move to stable assets like the U.S. dollar or gold.
Real Example
2008, the U.S. experienced a deep recession after the housing market collapse.
GDP shrank, the stock market crashed, and the U.S. dollar initially weakened before recovering as a safe-haven currency.
2. Inflation & Interest Rates
Inflation refers to the rate at which the prices of goods and services increase over time. High inflation reduces a currency's purchasing power, making it less attractive for forex traders. Central banks (e.g., the Federal Reserve and the European Central Bank) use interest rate hikes to control inflation. Higher interest rates strengthen a currency by attracting foreign investors.
How it impacts trading
Forex traders monitor inflation reports and interest rate decisions to predict currency movements.
Crypto traders react to inflation fears since Bitcoin is often seen as an inflation hedge.
Real Example
In 2022, the U.S. Federal Reserve raised interest rates aggressively to combat rising inflation (peaking at 9.1% in June 2022).
This caused a stronger U.S. dollar (USD surged against EUR, JPY, GBP).
A stock and crypto market crash (Bitcoin fell from ~$47,000 to ~$16,000 by the end of 2022).
3. Market Volatility (VIX Index)
The Volatility Index (VIX), or the "Fear Index," measures market uncertainty. A higher VIX score means greater market fear and turbulence, often seen during economic crises.
How it impacts trading
Forex traders use the VIX to gauge risk appetite—if the VIX is high, investors flee to safe-haven currencies like USD and JPY.
Crypto traders see higher volatility, often leading to extreme price swings.
Real Example
In March 2020, at the height of the COVID-19 crisis, the VIX skyrocketed to 82.69 (one of the highest levels in history), leading to a massive stock market crash (S&P 500 fell ~35%).
Bitcoin’s price dropped 50% daily, falling from ~$8,000 to ~$4,000.
4. Unemployment Rates
The unemployment rate measures the percentage of people actively seeking work but unable to find jobs. Rising unemployment shows economic distress, leading to lower consumer spending and business growth.
How it impacts trading
Higher unemployment weakens national currencies (forex traders sell those currencies).
Crypto traders see lower retail participation in markets due to financial uncertainty.
Real Example
In April 2020, U.S. unemployment spiked to 14.7%, the highest since the Great Depression. This led to a stock market crash and panic in crypto markets, with Bitcoin’s price crashing 50% in days.
Historical Examples of Economic Instability
Forex and crypto traders must study historical economic crises to understand how markets react during instability. Here are three key examples:
1. The 2008 Financial Crisis
What happened? The U.S. housing bubble burst, causing a banking collapse and global recession.
Forex Market Impact
The U.S. dollar initially weakened as the crisis began.
Later, the USD became a safe-haven asset, surging against other currencies.
Crypto Market Impact
Bitcoin did not exist yet (it was launched in 2009), but gold surged as a safe-haven asset.
Lesson for traders
Safe-haven currencies and assets (USD, JPY, gold) perform well in financial crises.
2. The COVID-19 Market Crash (March 2020)
What happened? The global pandemic caused economies to shut down, leading to panic selling across markets.
Forex Market Impact
Investors rushed into the U.S. dollar (USD), JPY, and CHF.
Emerging market currencies (TRY, ZAR) collapsed.
Crypto Market Impact
Bitcoin dropped 50% in a single day as investors fled risky assets.
However, BTC later recovered, rallying to new all-time highs in 2021.
Lesson for traders
Initially, crypto follows risk assets, but Bitcoin can hedge long-term crises.
3. Russia- Ukraine War (2022)
What happened? The Russian invasion of Ukraine led to global uncertainty and economic sanctions.
Forex Market Impact
The Russian ruble (RUB) collapsed, losing nearly 40% of its value before intervention.
Oil and gas prices surged, strengthening commodity-linked currencies (CAD, AUD).
Crypto Market Impact
Bitcoin saw increased adoption in Ukraine and Russia as an alternative currency.
Lesson for traders
Geopolitical risks create opportunities in commodity and safe-haven assets.
Related Reading
• How Can Economic Instability Affect You
• Why Does the Government Intervene in Markets?
• What is a Trade Sanction
• What Are Three Threats to the Future of Global Trade
• Protectionism is Sometimes Necessary in Trade
• Protectionism vs Free Trade
How Economic Instability Affects Forex & Crypto Markets
Currency Volatility & Flight to Safety
Investors and traders seek "safe-haven" currencies in times of economic instability, abandoning riskier assets. Safe-haven currencies retain their value during crises due to strong economic fundamentals, low inflation, stable government policies, and high demand in global trade.
Safe-Haven Currencies in Forex
U.S. Dollar (USD): The world's reserve currency, preferred during global financial crises.
Japanese Yen (JPY): A low-yielding currency that appreciates during economic downturns.
Swiss Franc (CHF): Known for Switzerland's strong banking system and neutrality.
Example: The 2008 Financial Crisis & the U.S. Dollar Surge
Before the 2008 crash, riskier currencies like the British Pound (GBP) and Euro (EUR) were strong. After the crash, investors rushed to the U.S. dollar, causing the Dollar Index (DXY) to rise by 25% between 2008 and 2009. Forex traders who longed the USD against riskier currencies profited heavily.
Emerging Market Currencies Collapse During Instability
Economic downturns hit emerging market (EM) currencies the hardest due to high government debt, dependence on foreign investments, and political instability.
Example: The Turkish Lira Collapse (2021-2022)
Inflation soared to 85%, causing the TRY/USD to plummet by over 40%. Forex traders shorting the Turkish lira made significant profits. The Turkish government had to impose capital controls to prevent further depreciation.
Central Bank Actions & Interest Rate Decisions
Central banks (e.g., Federal Reserve, ECB, Bank of Japan) use interest rates to control inflation and stabilize markets. When economic instability rises, central banks either: raise interest rates to control inflation (strengthening the currency); or cut interest rates to boost economic growth (weakening the currency).
Example: The U.S. Federal Reserve's Rate Hikes (2022)
In response to 40-year-high inflation (9.1%), the Federal Reserve increased interest rates from 0.25% to over 5% in 2022. This strengthened the U.S. dollar, causing EUR/USD to drop below parity for the first time in 20 years. Forex traders who longed the USD and shorted the EUR, GBP, and JPY made substantial profits.
Geopolitical Risks & Currency Crashes
Wars, trade sanctions, and political instability directly impact currency values.
Example: Russia- Ukraine War (2022)
After Russia invaded Ukraine, the Russian Ruble (RUB) lost 40% of its value in days. Forex traders who shorted RUB/USD saw significant gains. Russia had to intervene with foreign exchange reserves and capital controls to stabilize its currency. Commodities like oil and wheat surged due to supply disruptions, impacting forex markets.
Is Bitcoin a Hedge Against Inflation?
Bitcoin (BTC) is often compared to gold as a store of value, but historical data shows that BTC is initially volatile during crises but stabilizes later.
Example: Bitcoin’s Performance During the 2022 Inflation Surge
When inflation peaked in early 2022, the Federal Reserve aggressively raised interest rates. BTC dropped from $47,000 to $16,000 following the stock market crash. However, in 2023, BTC recovered to above $30,000 as banks failed, proving its long-term hedge potential.
Liquidity Crises & Crypto Sell-Offs
Unlike forex, where central banks intervene, cryptocurrency markets are purely supply-and-demand driven. When economic instability rises, investors pull money from high-risk assets like crypto, causing sell-offs.
Example: March 2020 Bitcoin Crash
As the COVID-19 panic spread, BTC dropped 50% daily, from ~$8,000 to ~$4,000. This was due to institutional investors' liquidating positions to cover losses in stock markets and margin traders' liquidating, triggering a cascade of stop-loss orders.
Stablecoins & Market Stability
During crises, traders move funds into stablecoins like USDT and USDC instead of exiting to fiat. However, not all stablecoins are safe.
Example: The Terra (UST) Collapse (May 2022)
UST, an algorithmic stablecoin, was supposed to maintain a $1 peg. It lost its peg and crashed to near zero, wiping out $40 billion in market value. Bitcoin and Ethereum crashed by over 30% in days. Traders who moved into USDT or exited to fiat avoided losses.
The Psychological Impact of Economic Instability on Traders
The Fear & Greed Cycle in Trading
Fear and greed drive markets more than logic. During economic instability, fear dominates: investors panic, sell assets, and rush to safe havens.
Greed follows
Traders fear missing out when markets recover and buy aggressively.
Example
Bitcoin’s boom-and-bust cycles (2017, 2021, 2022).
In 2017, Bitcoin surged to $20,000, driven by greed and FOMO.
In 2018, BTC crashed to $3,000, driven by panic selling.
In 2021, BTC hit $69,000, only to crash to $16,000 in 2022 due to economic uncertainty and Fed rate hikes.
Traders who recognized this cycle were able to profit from the volatility.
How Market Sentiment Influences Trading Decisions
Traders follow the crowd, often making poor decisions based on market sentiment rather than analysis. Fear indexes (VIX, Crypto Fear & Greed Index) measure investor emotions. VIX Index (S&P 500 Volatility Index): Higher VIX = More market fear.
Crypto Fear & Greed Index
Shows whether BTC is overbought or oversold based on sentiment.
Example
March 2020 COVID-19 crash.
The VIX spiked to 82.69, signaling extreme panic.
The Crypto Fear & Greed Index hit a record low, showing extreme fear.
Investors panicked and sold assets, only for markets to recover months later.
What is FOMO (Fear of Missing Out)?
FOMO happens when traders chase a rapidly rising market, fearing they’ll miss out on profits. It leads to over-leveraged trades, poor entries, and massive losses when markets reverse.
Examples of FOMO in Forex & Crypto Trading
Forex Example
GBP/USD Flash Crash (2016) After the Brexit referendum, GBP/USD plunged 6% in two minutes.
Traders panicked and shorted the pound after the crash, only for the GBP to rebound hours later.
Smart traders waited for confirmation before shorting rather than chasing panic.
Crypto Example
Dogecoin Mania (2021): In April 2021, Dogecoin (DOGE) rallied 900% in two weeks, fueled by Elon Musk tweets and social media hype.
New traders bought at the top ($0.70), expecting it to hit $1.
DOGE crashed 90% months later, leaving FOMO traders trapped in losses.
Panic Selling & Emotional Liquidations
Why Traders Panic Sell in Crashes
When markets collapse, traders emotionally sell their assets at a loss instead of waiting for a recovery. Factors that cause panic selling include extreme volatility (e.g., BTC dropping 30% in a day), margin calls and liquidations (when using leverage), and negative news that creates mass fear (e.g., bank collapses, fraud scandals).
Actual Examples of Panic Selling
March 2020 Bitcoin Crash. BTC dropped from $8,000 to $4,000 in a single day. Fear of a financial meltdown led to forced liquidations of leveraged traders. BTC recovered to $64,000 in 2021, proving that panic selling was a mistake. FTX Collapse (November 2022). Traders panicked when rumors spread that FTX was insolvent. Bitcoin and Ethereum crashed by over 25% in hours. Many traders sold at the bottom, only for prices to rebound.
Overtrading & Revenge Trading
What is Overtrading?
Overtrading occurs when traders take too many positions to compensate for losses. It leads to poor trade setups, high fees and margin losses, and emotional exhaustion.
What is Revenge Trading?
Revenge trading is when a trader immediately enters another trade after a loss, trying to win back money.
Example
Leverage trading after a loss A trader loses $5,000 on a BTC short. Instead of stepping back, they opened a 50x leverage long, hoping for a quick win. If the BTC drops, they get liquidated and lose everything.
Real-World Example: The LUNA Collapse & Leverage Traders (May 2022)
LUNA crashed from $80 to $0.01 in a week. Traders kept longing at each level, expecting a bounce. Over $3 billion in liquidations happened as leveraged traders lost everything.
GoMoon Uses AI To Decode Economic Events For Smarter Trading
GoMoon transforms economic calendar data with AI-powered insights for smarter trading decisions. Our platform analyzes global events and rates their market impact on a scale of 1 to 10, helping you understand how they'll affect various assets. We've packed everything traders need: live economic event streaming, custom notifications, and historical event replay with TradingView charts. What sets us apart is our comprehensive approach to event analysis.
Whether you're tracking the impact of major economic announcements or comparing forecast data with actual outcomes, GoMoon provides straightforward, actionable insights. You can personalize your calendar, stream live meetings directly on the platform, and analyze historical events like the dot-com bubble or the COVID-19 crash to understand market reactions better. GoMoon clarifies the complex world of economic events for traders seeking data-driven decisions. Get started for free to get AI-powered economic insights today.
Strategies to Protect Your Investments During Economic Instability
Using GoMoon.ai to Track Economic Events & Market Impact
Economic instability often starts with significant financial events like fluctuations in interest rates, GDP reports, inflation spikes, and geopolitical crises. Traders who monitor these events in real time gain a critical edge in market decision-making.
GoMoon.ai provides an AI-powered economic calendar that helps traders track and analyze upcoming financial events. You can customize your calendar to focus on events that impact forex pairs, cryptocurrencies, and commodities.
For example, a forex trader tracking Federal Reserve rate hikes can use GoMoon.ai notifications to prepare for USD volatility. A crypto trader monitoring inflation reports can adjust Bitcoin positions based on macroeconomic trends.
Real-Time Economic Event Tracking
GoMoon.ai provides an AI-powered economic calendar that helps traders track and analyze upcoming financial events. You can customize your calendar to focus on events that impact forex pairs, cryptocurrencies, and commodities. For example, a forex trader tracking Federal Reserve rate hikes can use GoMoon.ai notifications to prepare for USD volatility. A crypto trader monitoring inflation reports can adjust Bitcoin positions based on macroeconomic trends.
AI Market Impact Score (1-10)
GoMoon.ai assigns a 1-10 impact score to each event, helping traders determine how significant an event will be for market movements. A high-impact score (9/10) for an interest rate hike signals that forex and crypto markets will see substantial volatility. Traders can adjust their positions before the event happens.
Historical Event Replay for Pattern Analysis
Traders can analyze past market reactions to similar economic events using historical replay. For instance, reviewing how BTC and USD reacted to the 2020 COVID-19 market crash can help traders prepare for similar events in the future.
Custom Event Notifications
Traders can set alerts for key events that affect their portfolios. For example, a forex trader focusing on EUR/USD can receive instant alerts when the European Central Bank (ECB) releases new policy decisions. Using GoMoon.ai’s AI-driven insights, traders can react faster to economic instability, reduce risk, and capitalize on market movements.
Risk Management Strategies to Protect Investments
Risk management is the most critical factor in surviving economic instability. Traders must limit losses, secure profits, and avoid emotional trading decisions. Setting stop-loss and take-profit orders can minimize unexpected losses and ensure stable profits. Using proper position sizing can also avert catastrophic losses in volatile conditions. Finally, hedging strategies and avoiding overleveraging can help maintain market exposure while limiting risk during economic uncertainty.
Setting Stop-Loss & Take-Profit Orders
Stop-loss orders automatically exit a trade when the price moves against the trader. Take-profit orders ensure that profits are locked in before markets reverse. For example, consider a scenario where a trader buys GBP/USD at 1.2000, expecting an uptrend. To protect against unexpected volatility, they set a stop-loss at 1.1950. If a negative economic report causes GBP/USD to drop, the trade exits at 1.1950, preventing further losses.
Using Proper Position Sizing
Traders should only risk 1-2% of their capital per trade. This prevents large drawdowns when markets become unpredictable. For example, a trader with $10,000 capital should risk only $100-$200 per trade. If the market moves against them, they still have enough capital to recover.
Hedging Strategies to Offset Losses
Forex traders hedge by opening opposite positions on correlated currency pairs. Crypto traders hedge by shorting futures contracts while holding long-term positions. For instance, consider a scenario where a trader is long EUR/USD but expects volatility. They can short GBP/USD to offset risk. If the market crashes, the short trade profits while the extended trade losses are minimized.
Avoiding Overleveraging
Using high leverage (e.g., 100x on forex or crypto trades) increases liquidation risk. Traders should use low leverage (1x- 5x) during economic uncertainty. For example, many traders overleveraged Bitcoin positions at $50,000 before the Fed’s interest rate hikes in 2022. When BTC dropped, they were liquidated, losing all funds. Traders who used low leverage or stayed in stablecoins avoided significant losses.
Moving to Safe-Haven Assets During Economic Crises
During periods of instability, investors shift capital into safer assets to protect their portfolios. Forex traders can benefit from turning to safe-haven currencies while crypto traders can move to stablecoins. Precious metals like gold and silver can also provide reliable long-term value during economic uncertainty.
Forex Traders: Shifting to Safe-Haven Currencies
In economic distress, traders buy currencies that remain strong during financial crises. The U.S. Dollar (USD) strengthens due to high global demand. The Japanese Yen (JPY) also appreciates when markets crash. The Swiss Franc (CHF) is another stable currency that retains value due to Switzerland’s strong financial sector. For example 2008, as the stock market collapsed, the USD and JPY surged. Forex traders who bought USD and shorted GBP/EUR profited while others lost money.
Crypto Traders: Moving to Stablecoins
During extreme volatility, crypto traders convert assets into stablecoins (USDT, USDC) to avoid price swings. For instance, when FTX failed in November 2022, BTC crashed 25% in days. Traders who moved to USDT before the news broke avoided losses.
Investing in Precious Metals (Gold & Silver)
Gold and silver hold value during financial crises and are seen as inflation hedges. For example, as inflation surged in 2022, gold prices rose from $1,700 to $2,000 per ounce, protecting investors' portfolios from inflationary losses.
Trading the News & Economic Data Effectively
Traders can profit from economic instability by reacting to major economic reports. Monitoring interest rate decisions can help traders anticipate future market movements. Watching inflation reports and employment data also provides insights into financial health. Finally, avoiding market manipulation and fake news will help traders avoid making costly mistakes.
Monitoring Interest Rate Decisions
Central banks (Fed, ECB, BoE) adjust interest rates based on inflation and economic health. Higher interest rates strengthen a currency, while lower rates weaken it. For example, in 2022, the Fed raised rates aggressively. Traders who shorted EUR/USD and GBP/USD profited as USD strengthened.
Watching Inflation Reports & Employment Data
High inflation leads to rate hikes, which impact forex and crypto markets. Rising unemployment weakens a country’s currency. For example, the USD soared when inflation hit 9.1% (the highest in 40 years) in June 2022. Traders who went long USD/JPY made profits.
Avoiding Market Manipulation & Fake News
During economic crises, misinformation spreads quickly. Traders should use verified sources like GoMoon.ai’s AI-driven event analysis. For instance, in 2021, Musk’s tweets caused BTC to rise and crash multiple times. Savvy traders who waited for confirmation avoided FOMO losses.
GoMoon Uses AI To Decode Economic Events For Smarter Trading
GoMoon transforms economic calendar data with AI-powered insights for smarter trading decisions. Our platform analyzes global events and rates their market impact on a scale of 1 to 10, helping you understand how they'll affect various assets. We've packed everything traders need: live economic event streaming, custom notifications, and historical event replay with TradingView charts. What sets us apart is our comprehensive approach to event analysis.
Whether you're tracking the impact of major economic announcements or comparing forecast data with actual outcomes, GoMoon provides straightforward, actionable insights. You can personalize your calendar, stream live meetings directly on the platform, and analyze historical events like the dot-com bubble or the COVID-19 crash to understand market reactions better. GoMoon clarifies the complex world of economic events for traders seeking data-driven decisions. Get started for free to get AI-powered economic insights today.
Related Reading
• How Does Inflation Affect the Stock Market
• How to Deal With Market Volatility
• Economic Factors Affecting Business
• How Does Election Affect Stock Market
• How Does War Affect the Economy Positively
• How Does War Affect the Stock Market
• Political Factors Affecting Business
• Impact of Trade War on Global Economy
• How Does the Stock Market Affect the Economy
Use Our AI-powered Economic Calendar Tool for Free Today
Economic instability refers to sudden economic fluctuations that create an unpredictable business environment. Economies are constantly changing, but when financial stability is low, the rate of change increases dramatically and can lead to sudden and severe consequences. For example, if an economy is experiencing high inflation, it may be stable.
However, if the inflation rate suddenly changes, causing a recession or other economic crisis, both businesses and consumers can be severely impacted. Financial instability can affect nearly every aspect of an economy and lead to unpredictable changes in employment, prices, and even the availability of goods and services.
GoMoon brings clarity to the complex world of economic events. Whether you're tracking the impact of major economic announcements or comparing forecast data with actual outcomes, GoMoon provides straightforward, actionable insights. You can personalize your calendar, stream live meetings directly on the platform, and analyze historical events like the dot-com bubble or the COVID-19 crash to understand market reactions better. GoMoon is essential for traders seeking data-driven decisions to navigate economic releases. Get started for free to get AI-powered economic insights today.
Related Reading
• How Does the Economy Affect a Firm’s Profit?
• Hedging Tools
• How to Prepare for a Stock Market Crash
• What Happens to the Stock Market During a Recession
• How to Trade Volatility
• How to Trade During a Recession
• Macroeconomic Analysis
• How to Prepare for Economic Collapse