I became interested in the altcoin DeFiChain (DFI) early in my crypto journey, but it wasn’t offered on my go-to exchange (Gemini). I read that it was available on KuCoin, but after I signed up I realized that I wasn’t able to deposit my hard-earned US Dollars directly into a trade account like I could on some other exchanges. I would need to buy the DFI with another cryptocurrency.
This posed a new challenge for me. I didn’t want to trade away any of my holdings at that time, so I’d have to buy crypto at one exchange using USD, transfer it to KuCoin, buy DFI using my recently transferred crypto, and then transfer the DFI out of KuCoin. This process included more steps than just transferring money from my bank account and buying what I wanted to buy, but it nevertheless seemed pretty straightforward. But as I thought about it more, I realized that there were a lot of things I needed to consider. I’ve listed a few of them here:
- I’d need to make two trades to buy DFI instead of just one. It would therefore be in my best interest to minimize transaction fees.
- I’d make the trades across two different exchanges, so I’d need to factor in transfer fees as well.
- Cryptocurrency is volatile, and I wouldn’t be able to buy the DFI instantly because of all the steps I needed to take. If I wasn’t careful, price changes in DFI and the transferred crypto would impact how much DFI I received at the end of the transaction.
Many people who invest in crypto find themselves in situations like this one. This article includes a description of my experience buying DFI, but the principles regarding fee calculations and changes in spot prices can be applied in any similar situation. Let’s start with the fees.
Fees
I used Bitcoin (BTC) as a conversion currency when I bought DFI for the first time. BTC and DFI are both very volatile, but for the purpose of calculating fees, lets assume that neither coin changed in price as I made the conversion. With that assumption in mind, we can determine the fees for the transaction using the equation below:
W + X + Y + Z = T where the following is true:
- W is the fee associated with the purchase of my conversion crypto (BTC).
- X is the fee associated with transferring my conversion crypto to KuCoin.
- Y is the fee associated with the purchase of DFI using BTC.
- Z is the fee associated with transferring my DFI out of KuCoin.
- T is the sum total of the fees I paid to buy the DFI.
I bought BTC using a maker order pushed through the Gemini API. When I initiated the transaction, transaction fees for maker BTC orders run through the Gemini API were pegged at 0.1 percent of the total transaction amount.
Gemini allows ten free withdrawals per month, so I was able to transfer my BTC to KuCoin for free.
I bought the DFI in KuCoin using my BTC. When I initiated that transaction, taker and maker order fees on KuCoin were both pegged at 0.1 percent of the total transaction amount.
Lastly, I withdrew the DFI from KuCoin. KuCoin charged a flat fee of 0.1 DFI for all DFI withdrawals at that time.
With the above in mind, we can plug specific values into the equation given earlier to determine the total fee amount I paid for the conversion. Here are the fees I paid to buy DFI:
(0.001 x A) + 0 + (0.001 x (A - (0.001 x A))) + 0.1D = T where the following is true:
- A is equal to the total transaction amount.
- D is the cost of DFI in USD at the time of the transaction.
- T is the sum total of the fees I paid to buy the DFI.
Your fee structure may or may not be similar to this example depending on what exchanges you use, but it is nevertheless helpful to identify all fees beforehand to avoid overpaying for your crypto.
The Impact of Changes in Spot Prices During A Conversion
I mentioned earlier that both of our example coins, BTC and DFI, are volatile. Changes in the spot prices of the two coins over the course of the conversion — after you buy BTC, but before you buy DFI — can alter the total value of the DFI you receive at the end of the process. roughly speaking, changes in price can work for or against you depending on how the coin prices change in relation to one another and in relation to your native currency during the course of the conversion from your native currency to DFI.
Alarmingly, there be can be a negative impact on the conversion, meaning that you get DFI with a total value that is less than that of the native currency you paid. However there can also be no impact to the value or even a positive impact, meaning that you get DFI with a total value that is more than that of the native currency you paid.
How To Minimize Changes In Spot Prices During A Conversion
It can be difficult and confusing to identify situations in which you can use the aforementioned changes in spot prices to your advantage. Furthermore, you’d have to time the market and make short-term predictions about changes in price. These types of predictions cannot be reliably made — you could get lucky, but you could also lose money. It is therefore easier and simpler to minimize any impact made by changing spot prices. This can be done by making the trades as quickly as possible to minimize the chances of a significant price change. You can also use a stablecoin like Tether (USDT) to make the conversion (you can buy DFI using USDT on KuCoin).
Interested in trading crypto? Sign up for Gemini using this link, and we’ll both get $10 in Bitcoin when you buy or sell $100 or more within 30 days of opening your account. See terms for details.
I am a crypto enthusiast. I am not a financial advisor, and nothing I say constitutes financial advice. All statements I make are opinions and should not be treated as fact without further research.
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Article cross-posted from Medium.