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What is a crypto swap, and how does swapping cryptocurrency work?

Igor Grigorchenko

News editor

Jul 26, 2022 at 05:52

Today we will discuss swaps — a common operation in crypto markets, which may be as popular as trading. A swap is an exchange (or temporary exchange) of any assets in trading on the stock exchange.

A curious reader may immediately ask a fair question — if it is just an exchange, why is this instrument called a separate term “swap”?

To answer simply, a swap is an advanced exchange connected with many additional conditions. For example, such an exchange can stretch out over several years, or the swap can result in the asset eventually being returned to the seller. To complicate matters, several types of swaps implement different exchanges, but I hope you have a general idea. Swaps allow you to eliminate even the most difficult-to-sell commodity by creating flexible exchange terms.

But do not be frightened — we will give you more details and explanations below, but for now, let’s conclude with the academic definition of the simplest swap:

A swap is a conversion transaction to exchange assets for a specified period. 

What is crypto swapping?

Crypto swapping can be seen as a form of exchange that can only be initiated with a crypto coin and for another crypto coin. These coins may not necessarily possess the same market value, but they tend to balance each other out through the amount offered and received. Thus, it is a complex form of exchange, which can become equivalent only after some time and under certain conditions. 

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It should be understood that the swap is unlikely to bring significant income because this financial instrument is most often used to hedge risk. The logic of its usage should be considered from this point of view. Here is a simple example.

If you decide to swap Bitcoin for Ethereum, knowing fully well that their price value range differs, you would have a much greater amount of Ethereum at the end of your crypto swap. And as time progresses, if Ethereum gathers more value against Bitcoin, your crypto swap would greatly be in your favor should you decide to swap again for Bitcoins or trade for a fiat currency.

Why are crypto swaps so popular?

Crypto swapping has gained popularity for many reasons, which you will realize as you continue to read this article. But one reason which encompasses all others would be that crypto swaps have provided a lot more convenience for crypto coin owners worldwide. 

At the end of each process, the point would be to maintain ownership of some crypto coin, thereby preserving the possibility of acquiring profit over time. Here are some reasons why crypto swaps have become such a popular trend.

 

  1. Instability. Many will agree that the instability of crypto coins can cause quite a scare, especially during the crypto winter when major crypto coins experience a drastic drop in value. This drop in value affects major currencies at a higher percentage than altcoins since they possess a larger mass of ownership and market capital volume. Some may decide that the safest option would be to trade their major cryptocurrencies for stable fiat currencies that don’t drastically lose value overnight. But the safest option can’t always be the most profitable. Whenever major crypto coins begin to lose value, altcoins experience a rise in value as well; this is because of the shift in crypto market attention. Crypto swaps allow you to maintain your claim in crypto coins and acquire some gain while major crypto coins gather their value back.
  2. Airdrop. Airdrops allow people the opportunity to acquire crypto coins for free or in exchange for services that may aid the popularity of that coin. While some airdrops may become major crypto coins that can get traded for fiat currency on major exchange platforms, others could become unpopular new crypto coins still in the works. Another reason why swaps are so popular is the fact that not all platforms accept or trade these coins. For this reason, people who acquire these airdrops and notice a potential flop in the project quickly swap them for major currencies, which stand a better opportunity at gaining value in the long run.
  3. Games. Many online games only allow users to make in-game purchases using specific tokens designed by their gaming companies. These tokens are made available for sale only through crypto coins. And when they offer their users rewards, those rewards may only be earned exchangeable for specific crypto coins. Through this status quo, these gaming platforms have made it compulsory for users to use crypto swap platforms if they wish to enjoy the full privileges the game has to offer.

Swapping vs Trading

Trading and Swapping share a very close similarity. For anyone to fully understand the difference between both, they would need to pay close attention to the action being carried out on the exchange platform of their choosing. Even though trading is executed with the same concept as swapping, they can not be interchanged in the world of crypto coins; here’s why.

Trading is done based on a platform’s available pairs of crypto coins. Let’s say you have just acquired some fiat currency via P2P purchase. While this purchase has already cost you some fee to acquire, you would still be required to pay another fee when you choose to purchase a crypto coin with it. This process requires two steps: acquiring and using fiat currency to acquire a crypto coin. Trading requires a stable fiat or active crypto coin trading pair to be executed.

Swapping, on the other hand, offers you the option to acquire a crypto coin in exchange for another crypto coin. Crypto swaps are dependent on what coins the platform you use offers.

How swapping on CEX vs. DEX?

Swapping has become a faster means for crypto coins owners to maintain their ownership of crypto coins at the end of exchange; it cuts through the extra step of purchasing crypto coins after converting them to fiat currency. This has made crypto swap a form of exchange that is often sought, and there are various ways in which you can Swap your crypto coin right away. 

The two major way categories of exchange platforms that allow their users to crypto swap are CEX (Centralized Exchanges) and DEX (Decentralized Exchanges). Both have proven very effective, but they share a great deal of difference. While one is centered around a custodian that requires you to undergo a verification process, the other is decentralized and requires little to no information to execute your crypto swap.

How to Swap Cryptocurrencies?

The process for swapping cryptocurrencies depends on the platform you use for your crypto swap. For centralized exchanges, you will be allowed to swap through P2P. after verification. However, for decentralized exchanges, a user must connect their wallet, select the crypto coin they wish to swap, select that which they want to swap for and input the appropriate amount before clicking the swap button.

There are three common ways users of crypto coins can swap their crypto coins, and we will discuss some facts you should know about them below.

Centralized Exchanges

  • They are centered around an authority, middle man, or third party that secures your crypto swap by holding on to your crypto coin within the platform until the receiving party releases their equal value of the crypto coin you have selected to swap for. This makes them more secure.
  • They function on a KYC (Know Your Customer) bases. This demands that you provide information that verifies your identity and therefore beats the whole purpose of decentralization.
  • They generally offer more features, graphs, and indicators, needed mainly by traders and not users seeking to execute a basic crypto swap.
  • There is a lesser chance of users finding newly listed crypto coins that haven’t gathered much popularity or stability in the general crypto coin market.
  • Some examples of Centralized crypto coin platforms include Binance, Gemini, and Coinbase.

Decentralized Exchanges

  • They are decentralized and directly between the user and the platform. You select your chosen crypto coin and swap it for the equivalent amount you wish to acquire.
  • They either require little or no registration since trades are directly between users.
  • They possess lesser features and focus their functionality on swapping crypto coins,
  • They have a more comprehensive range of crypto coins on their platforms since anyone can make one there. This also leaves an opportunity for scammers to lead people to buy fake coins on their platforms.
  • Some examples of Decentralized crypto coin platforms include Uniswap, Pancakeswap, and Sushiswap.

OTCs

  • They are much simpler to function with, but their simplicity comes with a lot of vagueness, leading people to pay a higher price than the true worth of their crypto swap. 
  • OTCs are most often platforms that are closed to the general public, which also operate with large amounts of money.

Top Tips for Swapping Cryptocurrencies

  • Do your research. Ensure that the platform you execute your crypto swap on is reputable and the crypto coin you swap for is authentic.
  • Check through your details to ensure they are accurate and you don’t lose all your money with a hasty button click.
  • Pay attention to the news, so you don’t crypto swap for a coin just about to get delisted on every other platform, including the one you use.
  • Have a cold wallet where you store your large amounts of crypto coins and an extra wallet you can risk connecting to these platforms without fear of loss.
  • Be safe and act according to the rules and regulations of the platform you use to prevent loss from a blocked or suspended account.

(с) The article is written by Paul Awoniyi, 2022

All information provided on this website is for educational and informational purposes only. Please consult with our Disclaimer.

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