Fiat-to-Crypto Versus Crypto-to-Crypto: How Should You Trade?

Fiat-to-crypto: an on-ramp for newcomers

Fiat-to-crypto trading is the primary avenue for new participants who are entering the crypto markets. Buying bitcoin (BTC) with dollars, euros, pounds or other forms of fiat is typically how newcomers enter the world of digital asset investing.

More advanced traders will typically deposit fiat currency on exchanges, such as Binance, Gemini, Kraken or others, and trade the most popular cryptoassets against fiat currency. Cashing out then usually involves withdrawing fiat currency from the exchanges via bank transfer.

In light of the general upward performance of leading cryptoassets, most notably BTC and ethereum (ETH), investors who went from fiat-to-crypto and stayed in crypto fared well over the past five to ten years.

As a result, fiat-to-crypto has established itself as the primary way of investing in digital assets.

However, when it comes to riding the wave of a bull market, crypto-to-crypto trading may be a better alternative.

Crypto-to-crypto: how pros trade market cycles

In todays global economic climate – where money printers are running louder and faster than ever – and fiat currency is losing its value against cryptocurrency, some experts believe that crypto-to-crypto is the only way to trade digital assets, especially if you are looking to profit from market cycles.

Su Zhu, the CEO at Three Arrows Capital, once wrote 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 refers to converting one digital asset for another to take advantage of market opportunities while keeping crypto as your trading capital.

Typically, the digital assets that traders will hold their trading capital in will be BTC, ETH, or a stablecoin, such as tether (USDT), USD coin (USDC) or DAI.

Crypto-to-crypto trading: the benefits

Experienced traders who want to capitalize on new opportunities in the burgeoning decentralized finance (DeFi) market or take bets in the altcoin market are better served by remaining in the crypto sphere as this provides them more flexibility and an array of benefits. The benefits of crypto-to-crypto trading include:

• an ability to move funds quicker;

• increased fund security via decentralized trading;

• yield-generating opportunities for overnight/dormant funds;

• the opportunity to capitalize on DeFi investments.

If you are holding funds in crypto, you can quickly execute a new trade when the opportunity arises. There is no need to wait for a bank transfer to clear or for a card payment to settle.

Trading crypto-to-crypto typically means using decentralized exchanges (DEXes), such as Uniswap, to convert one digital asset to another. The use of DEXes increases fund security as you keep control over your assets while you trade. Conversely, when trading fiat-to-crypto, you will have to store funds on (potentially vulnerable) centralized exchanges, which is why many professional crypto traders prefer to remain in the crypto sphere and use DEXes.

When you hold your trading capital overnight in crypto – as opposed to in fiat – you have the option to store your funds in a yield-generating protocol that will, most likely, generate more yield than your bank account. In turn, this enhances your trading revenues.

Additionally, when trading crypto-to-crypto, you have the ability to seamlessly move funds in and out of various DeFi protocols to maximize yield. Centralized fiat-to-crypto exchanges typically do not offer this option.

Crypto-to-crypto trading: the drawbacks

Despite all its potentially profit-generating advantages, crypto-to-crypto trading also has drawbacks. They include the following:

• this is a form of trading that is only advisable for advanced, crypto-savvy traders and investors;

• you risk losing funds due to code vulnerabilities in DEXes and DeFi protocols;

• a fiat off-ramp will – eventually – still be necessary at some point.

Unfortunately, crypto-to-crypto trading is an experienced traders game. Unless you are comfortable with managing and storing your funds yourself and interacting with smart contracts, you may well struggle in the world of DeFi.

While fund security is higher when using decentralized exchanges instead of centralized exchanges, code vulnerabilities in decentralized trading protocols pose a serious risk for crypto-to-crypto traders. Therefore, it is advisable to stick to audited, established decentralized finance protocols. However, as history teaches us, even audited protocols can be compromised.

Finally, once its time to cash out (and pay tax on your profits), you will still need a crypto-to-fiat off-ramp. So staying entirely in crypto is essentially impossible – unless, that is, your tax office accepts crypto payments!

The takeaway

Fiat-to-crypto is the preferred on-ramp – and investment method – for newcomers and long-term HODLers. So, if you are looking to buy and HODL bitcoin or ethereum, for example, turning your local currency into a cryptoasset probably makes sense.

Conversely, if you are looking to actively trade the crypto market, deploy yield-maximizing strategies in the DeFi markets and exploit trading opportunities in the altcoin market, crypto-to-crypto arguably makes more sense because of the agility and flexibility this way of trading provides you.