What a Crypto Swap Is and How To Do It

If you want to explore new and upcoming cryptocurrencies, you might be wondering where to get hold of these interesting assets. As you may have seen, getting your hands on an alt-coin isn’t always easy. Even some more common cryptocurrencies can be hard to get hold of depending on what the exchanges in certain regions can offer. 

However, if you have some crypto already, on-ramping into a new asset is not your only option. To get exposure to a new or experimental asset, a great option is swapping a cryptocurrency you already have for something else.

Let’s say you have some $ETH and want a memecoin like $SHIB instead. Well, it’s not as complicated as you think. But before we dive into the details, let’s first explore what a crypto swap is and why you might want to initiate one.

What is a Crypto Swap?

A crypto Swap is a nifty feature that allows you to swap one cryptocurrency for another. It’s similar to doing a currency conversion. Except this conversion is between cryptocurrencies; like Bitcoin (BTC), Ether (ETH), or any other alt-coin you like.

How to swap Crypto 

Typically, you’ll need a crypto exchange to swap crypto. However, crypto exchanges don’t all operate in the same way. Let’s look at some of the options you have.

Use a centralized exchange

Most beginners will use a centralized exchange (CEX) to swap assets. Centralized exchanges like Binance and Kraken will allow you to swap one currency for another within their platforms. Often, this swap will be completely free, as centralized exchanges tend to use custodial wallets but that’s not always the case. Since these platforms are centralized, you’ll have to pay the fee of their choosing.

In addition, using a centralized exchange means using their custodial wallets. In other words, you do not have access to the private keys that control your account. Unfortunately using these sorts of exchanges to swap crypto means you don’t have true ownership over your assets. “Not your keys, not your coins”: by using a centralized exchange’s custodial wallet, you risk losing access to your assets should the company go bankrupt or decide to freeze your accounts. 

Furthermore, using a centralized exchange wallet to swap your crypto will also involve a lengthy and invasive identification verification process called KYC. Since centralized exchanges are companies, they must register their businesses in their respective countries. This means your CEX wallet will be subject to local laws and regulations.

Then, much like traditional financial institutions, centralized exchanges use an order book system to execute trades. To put it simply, it means each person who buys a cryptocurrency is relying on another participant to sell that particular coin. 

Finally, since many centralized exchanges may also have limited functionality. You may not be able to perform certain on-chain transactions, and they may not support your chosen coin. This is particularly true for new and upcoming coins with lower market caps. 

Use a Decentralized exchange

Your other option for swapping cryptocurrency is to use a decentralized exchange (DEX). Unlike centralized exchanges, decentralized exchanges allow you to use non-custodial wallets, meaning you can swap crypto without forfeiting custody of your assets. 

This is possible thanks to the way decentralized exchanges execute trades. Instead of using an orderbook system, DEXs typically rely on Automated Market Makers (AMMs). This mechanism allows you to swap your crypto directly with the system using a liquidity pool. As long as the liquidity pool has enough of the asset you require, you can execute your swap immediately—without having to wait for a user who wants to perform a swap in the opposite direction.

Decentralized exchanges tend not to offer on-ramping services, however, that means they will not require you to undergo a KYC procedure. This is useful for those who want to stay pseudonymous on the blockchain and use crypto without the limitations of local laws and regulations. 

Pros Of Swapping Crypto

Of course, there are plenty of upsides to swapping your crypto. Sometimes swapping is much more beneficial than buying cryptocurrency outright. Let’s look at some of the biggest reasons you might want to swap crypto.

Taking Profits

Swapping crypto is a great way of taking profits. After all, who doesn’t like realizing profits?

To explain, if one of the coins you hold has increased in price, you may want to sell it to cash in on the difference. The problem is that exchanging your crypto for fiat incurs fees: you’ll have to pay gas fees to sell the cryptocurrency in the first place but typically, the exchange will charge you a service fee too. 

Swapping your crypto for stablecoins allows you to keep your holdings on-chain and avoid those charges. It also allows you to swap it back to your chosen cryptocurrency as you like. Traders often use this method to take profits as it makes the whole process more efficient and reduces trading costs eating into your profits.

Hedging Against Volatility

Sensing uncertainty in the market? No problem: swap your volatile cryptocurrencies for stablecoins and you’ll be home and dry! Let’s say you’ve aped into a volatile coin that you suspect may drop in value. Perhaps you’ve decided to put your funds into a memecoin, or possibly even a pump-and-dump. 

If you think the project is on its way out, you can quickly swap it for a stablecoin to maintain the value of your balance. In short, swapping crypto is a great way to escape a project you no longer believe in or suspect may dump in price.

Avoiding taxable events

One of the biggest concerns of some cryptocurrency holders is that they will be taxed when swapping assets. It’s an understandable concern, but often an invalid one. While we can’t get around paying tax, usually simply converting one cryptocurrency to another is not considered a taxable event since it’s not considered ‘disposing’ of your assets.  Simply holding cryptocurrencies shouldn’t change your tax liabilities. That means you can swap your crypto to your heart’s content.

Diversifying your Portfolio

Diversification is usually a pretty good weapon against risk. Put simply, you don’t want to put all of your eggs in one basket. Diversifying your crypto portfolio helps avoid the volatility associated with up-and-coming coins, and mitigate the risks of losing your funds to pump and dumps and rug pulls. If one coin fails, you can rest assured that the majority of your portfolio stays safe across multiple assets.

Risks of Swapping Crypto

Timing

Trading cryptocurrencies is always a risky business. You can profit quite a lot if you time the market correctly, but get it wrong and you could see significant losses too. A good way to mitigate this risk is to make sure you don’t invest more than you are willing to lose. Apart from that, you may want to use some crypto analytics tools to track the coin’s price fluctuations and follow the market sentiment using social media platforms.

Fees

Swapping cryptocurrencies usually includes a fee that may eat into your profits. Before swapping, make sure you calculate the fees involved and think about your potential profits. There’s no use making money if you have to pay it all back to a platform via fees.

Possibly Forfeiting Your Custody

As mentioned, swapping your crypto using a centralized exchange means forfeiting the custody of your assets. This can become a big issue should the exchange go bankrupt or shut down. To put it simply, a centralized entity can revoke your access to your custodial account which would mean losing access to your assets along with it. Worse even, if the CEO goes rogue or the company’s board decides to freeze your accounts, there’s not a lot you can do to recover your assets. 

To mitigate this risk, you should never use a custodial wallet for long-term storage. If you do use a centralized exchange to swap cryptocurrencies, a good practice is to immediately transfer your assets to a wallet you control, otherwise known as a non-custodial wallet. Another good solution is to use Ledger Live’s swap feature. With Ledger Live you can swap cryptocurrencies using decentralized or centralized exchanges directly within the platform. This way you can choose between different swap providers without forfeiting custody of your assets. 

Let’s see how it works.

Ledger Live’s Swap Feature

Ledger Live’s swap feature handles all of the technical side of a crypto swap behind the scenes. 

Ledger Live’s swap feature is essentially like an aggregator of swap providers such as Changelly, Paraswap, and 1inch. In short, Ledger Live gives you all of the information you need to choose the swap provider you need, from the assets they support to the fees involved. This way, you can make an informed decision and swap your crypto with confidence.

The best thing about swapping with Ledger Live is that even if you use a centralized swap provider, you don’t lose custody of your assets. Your crypto is sent and received directly from and to your Ledger device, guaranteeing you are the only one with access to your assets. No more worrying about rogue CEOs or last-minute terms and conditions changes. Your crypto remains within your control.

With Ledger Live’s swap feature, you can also keep track of each crypto swap through the history tab. This helps you keep tabs on the swaps you make, even if you use different swap providers each time. Not only that, but the feature also provides a fixed exchange rate each time. This means you can be sure exactly what you’re going to get: no need to factor in complex factors like spread or slippage. There’s even a floating rate option that allows you to execute a crypto swap at the best price. In short, Ledger Live makes swapping cryptocurrencies easy, secure, and trackable.

So what are you waiting for? Buy a Ledger hardware wallet device and swap via Ledger Live; with Ledger, only you have custody of your assets.