The global crypto market, despite the ongoing regulatory shaping-up, remains impacted by macro-economic changes and geopolitical tensions. For small-scale retail investors, the volatility element of digital assets continues to remain a matter of concern. Even top most assets — BTC and ETH — sometimes clock single day losses exceeding ten percent and then there are smaller tokens that swing in extreme directions amid market pressure.
At times when the market winds turn choppy, some traders convert their crypto holdings to stablecoins. This lets them remain within the digital assets ecosystem while being able to dodge financial risks around market fluctuation periods.
Stablecoins are crypto assets backed in 1:1 ratio with reserved assets like fiat currencies or gold. Tether and Circle are the top two stablecoins with current market caps of $186.7 billion and $75.04 billion respectively.
Swapping volatile crypto assets for stablecoins can be explained as hitting the breaks on the market risk, or moving from digital assets to cash.
In this article, we will understand the different ways in which one can convert their cryptocurrencies into stable assets.
Asset conversion
Major centralized exchanges offer a simple “conversion” or “swap” method through a button. Investors can select the asset they’d wish to offload and choose the stablecoin they’d wish to receive in return. Users of these exchange platforms can preform the conversion for zero visible fees.
Spot Trade method
Using the limit order feature on centralized exchanges, one can choose to trade their altcoins for stablecoins. They would, in this case, have to select a pair comprising of one crypto and one stablecoin — like BTC/USDC. They will then need to set a price that they are willing to sell the volatile token for and once the market hits that decided price, the alt asset will automatically be converted into the paired stablecoin.
Conversions through decentralized exchanges
Crypto holders using self-custody wallets and wish to opt for more privacy can swap volatile assets for stablecoins via decentralized exchanges. DEXes generally do not collect KYC details of the users, making transactions more private.
To do so, investors will have to link their third party wallets from platforms like MetaMask, Trust Wallet, or Phantom with decentralized exchanges. DEXes usually offer the swap feature, under which, individuals are required to choose the token they wish to exchange and again, select the stablecoin they want to exchange for.
For the first approval for such a transaction, a DEX could charge a nominal fee. Users will then need to confirm the transaction and initiate the swap of tokens. For the platform’s gas fee for first time transactions, users must hold a small amount of the platform’s native token.
Choosing the stablecoins
The market is flooding with crypto tokens, making the right selections confusing at times.
The two safe categories of stablecoins that one can consider exchanging their volatile tokens for are — fiat backed and crypto-collaterized.
USDC and USDT are fiat-backed stablecoins, pegged against the US dollar. DAI, on the other hand, is a crypto-backed token, maintaining its price via ETH.
Common mistakes to avoid
Performing asset swaps to stablecoin is rather simple via centralized exchanges. However, those using decentralized exchanges are required to be very vigilant while processing the exchange.
In order to ensure that bots or low liquidity do not chew away profits, DEX users must keenly oversee slippage and price impact. Slippage is defined as the difference between the expected price of an order and the price at the time of the actual order execution.
On DEXes, it is essential to verify that the swap is being ordered on the correct blockchain network and is being facilitated through legit stablecoins like USDC and USDT.