5 Things to Understand Before Trading Cryptocurrencies in 2020

If you’re ready to start the new decade by taking more control over your personal finances, trading cryptocurrencies may be one option to explore. While the world of cryptos as relates to investment is a complex one, it also figures to grow bigger and more active in the coming years, which will make it increasingly appealing to those looking to diversify their holdings. However, the new decade will also bring changes in cryptocurrency – which is why it’s important to understand a few basics about what you may be getting into.

The following should serve as a strong foundation if you’re interested in building your understanding of cryptos with an eye toward investment.

1. Federal Engagement

While a big part of the appeal of cryptocurrencies is the lack of any centralized agency controlling them, it’s also important to bear in mind that nothing is explicitly preventing the emergence of more oversight, or even of institutionally controlled cryptos. For instance, the U.S. Federal Reserve is said to be considering a digital form of analog money, and as cryptos become more widely accepted, government agencies may indeed need to face the implications and react accordingly. Thus, while cryptos’ decentralized nature is still among their perks, 2020 could see more attempts at legislation and influence from governments and financial institutions.

2. Halving

Bitcoin remains the best known and most valuable cryptocurrency. And as many may know, one of the things that has made it interesting from the beginning is the fact that there is a finite number of bitcoins – 21 million – that can ever be mined into circulation. In order to extend the process of reaching that limit, bitcoin mining was designed to be “halved” periodically. Specifically, with bitcoin mined in “blocks” produced every 10 minutes, The Next Web explains that halvenings occur after every 210,000 blocks are mined. The “halving” refers simply to the number of bitcoins released in each block. Currently, 12.5 BTC are rewarded to the miner with each block, but an impending halving (likely this coming spring) will reduce that number to 6.25 BTC. This is important to understand particularly if you’re interested in bitcoin investment; in the past, halvings have appeared to have direct effects on bitcoin price changes.

3. What’s Different About Stablecoins

The term “stablecoin” is relatively new to most, but these alternatives to traditional cryptos could carve out a more significant portion of the market moving forward. FXCM’s guide defines a stablecoin as “a digital currency that is pegged to another asset that has a ‘stable’ value” – which articulates concisely what makes it different from the average cryptocurrency. Whereas cryptos are intrinsically valuable (and as a result, quite volatile), stablecoins might be tied to assets as conventional and reliable as the U.S. dollar, making them less vulnerable to the wild swings in value we see with some cryptos. As to why these alternatives could become more prominent in 2020, it’s worth remembering that Facebook’s libra is essentially set up as a stablecoin. It’s had some hiccups in its development of late, but is still expected to be released some time this year, potentially serving as a mainstream example of stablecoins’ appeal and utility.

4. Historical Trends

This is a more general point, but as with any other commodity or investment asset, you can learn from the past behavior of a cryptocurrency. This doesn’t mean that you should take past chart patterns as exact indicators of what’s to come. However, researching the broad strokes of a given crypto – when it was invented and why, how it has performed over time, what hurdles it has seen (or overcome) in its development, and where and how it can be used – can certainly put you in a better position to make strategic decisions. Particularly if you’re considering adding cryptos to your investment portfolio, remember that more information is always a good thing.

5. Your Wallet Options

As more people are becoming aware, there are numerous types of cryptocurrency wallets designed to make it easy for people to handle a currency that – strictly speaking – doesn’t really exist in any tangible form. These include paper wallets, hardware wallets, and software wallets, with each type providing certain pros and cons for the average user. Perhaps inevitably though, software wallets – those that exist as computer programs and apps – seem to be winning out in terms of broad usage. This has been a competitive process, which is good in that it’s weeded out some of the less stable wallets. However, it’s also produced many popular options, which means it’s important to do your research in this regard as well. The Balance’s look at the best wallets heading into 2020 identifies several strong options that any first-time crypto user would do well to look into. Ultimately though, you should determine what you most value in a crypto wallet (whether it’s security, convenience, quick transactions, low fees, etc.), and adjust your search accordingly.

Article exclusively written for MoneyAnswers.com

By Susan May