As the crypto markets continue their bull run, clever traders are profiting from market swings. However, what is the optimal method of trading cryptocurrency?
Join us as we dissect the basics of fiat-to-crypto and crypto-to-crypto trading – and debate which is the most prudent course of action in the current market environment!
Fiat-to-crypto conversion: a gateway for newcomers
Fiat-to-crypto trading is the key entry point for new players to the cryptocurrency markets. Typically, newbies enter the realm of digital asset investing by purchasing bitcoin (BTC) with dollars, euros, pounds, or other fiat currencies.
Typically, more sophisticated traders may deposit fiat currency on exchanges such as Binance, Gemini, Kraken, and others and trade the most popular cryptoassets against fiat currency. Cashing out then entails withdrawing fiat currency via bank transfer from the exchanges.
Given the general upward performance of prominent cryptoassets, most notably bitcoin (BTC) and ethereum (ETH), investors who switched from fiat to crypto and stayed in crypto during the last five to ten years have fared well.
As a result, the fiat-to-crypto conversion has become the principal method of investing in digital assets.
However, if you’re looking to ride the bull market’s wave, crypto-to-crypto trading may be a better option.
Crypto-to-crypto: how professionals profit from market cycles
In today’s global economic climate, where money printers are operating louder and faster than ever before and fiat currency is losing value against cryptocurrency, some experts believe that crypto-to-crypto trading is the only viable option for trading digital assets, particularly if one wishes to profit from market cycles.
Su Zhu, Three Arrows Capital’s CEO, once stated on Twitter:
“[…] You would have made more selling BTC to ETH than BTC to USD at the local 41k top. Crypto/crypto if you want to play cycles. Crypto/fiat up only.”
Crypto-to-crypto trading is the process of exchanging one digital asset for another in order to profit from market opportunities while maintaining control over your trading capital.
Typically, traders’ trading capital will be held in BTC, ETH, or a stablecoin such as tether (USDT), USD coin (USDC), or DAI.
The advantages of crypto-to-crypto trading
Experienced traders looking to take advantage of new chances in the emerging decentralized finance (DeFi) sector or place bets in the altcoin market are better off remaining in the crypto sphere, as this gives them with greater flexibility and a slew of perks. Among the advantages of crypto-to-crypto trade are the following:
a faster transfer of funds; better fund security through decentralized trading; yield-generating potential for overnight/dormant funds; the ability to profit from DeFi investments.
If you have funds in cryptocurrency, you can immediately execute a fresh deal if an opportunity presents itself. There is no need to await the clearing of a bank transfer or the settlement of a card payment.
Trading crypto-to-crypto often entails converting one digital asset to another via decentralized exchanges (DEXes), such as Uniswap. The usage of DEXes improves fund security by allowing you to maintain control of your assets while trading. In contrast, while trading fiat for crypto, you will be required to store funds on (possibly dangerous) centralized exchanges, which is why many professional crypto traders prefer to stay within the crypto realm and use DEXes.
When you hold your trading capital overnight in crypto – as opposed to currency – you have the option of storing it in a yield-generating protocol that will almost certainly create a higher rate of return than your bank account. As a result, your trading revenue increases.
Additionally, when trading crypto-to-crypto, you can smoothly transfer funds between several DeFi protocols to maximize profit. Typically, centralized fiat-to-crypto exchanges do not offer this feature.
The disadvantages of crypto-to-crypto trade
Despite its potential for profit, crypto-to-crypto trading does have some disadvantages. Among them are the following:
This is a form of trading that is only recommended for expert, crypto-savvy traders and investors; you risk losing cash owing to code flaws in DEXes and DeFi protocols; and a fiat off-ramp will – eventually – remain necessary.
Regrettably, crypto-to-crypto trading is a game for seasoned traders. Unless you are comfortable managing and maintaining your cash independently and communicating with smart contracts, you may find it difficult to navigate the DeFi environment.
While using decentralized exchanges rather than centralized exchanges provides greater fund protection, coding flaws in decentralized trading protocols offer a severe risk to crypto-to-crypto traders. As a result, it is prudent to adhere to established, audited decentralized finance systems. However, as history has demonstrated, even audited procedures are susceptible to compromise.
Finally, when the time comes to cash out (and pay taxes on your winnings), you will require a crypto-to-fiat conversion. Thus, remaining totally in crypto is nearly impossible – unless your tax office allows cryptocurrency payments!
Fiat-to-crypto is the ideal entry point – and investment strategy – for newbies and long-term holders of cryptocurrency. Thus, if you’re interested in purchasing and hodling bitcoin or ethereum, for example, converting your local currency to a cryptoasset makes sense.
On the other hand, if you want to actively trade the crypto market, employ yield-maximizing methods in the DeFi markets, and take advantage of trading opportunities in the altcoin market, crypto-to-crypto trading may make more sense due to the agility and flexibility it gives.
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