The opportunity for profit in cryptocurrency markets starts with choosing which coin pairs to trade, yet — what are they, and how do you choose?
Strap in and level up your crypto trading IQ as we dive into the dynamic world of cryptocurrency trading pairs!
Whether you're a crypto greenhorn or an old hand at trading digital assets, you know one truth holds constant: do your homework before putting your hard-earned money on the line. But with thousands of coins and endless trading pairs to choose from, where do you even start?
Good news — we've got you covered. In this guide, we'll explain everything you need to know about crypto trading pairs in plain terms. You'll learn how pairs work and key factors in choosing a pair. Arm yourself with knowledge before hitting the exchange — your portfolio will thank you.
What Is a Cryptocurrency Trading Pair?
Trading pairs are the bread and butter of crypto trading. They refer to the two assets being exchanged, usually one crypto for another. The base currency is the one being bought or sold, while the quote currency is what it's traded against to determine the price.
For example, in the BTC/ETH pair, bitcoin is the base currency and ether is the quote. The price tells you how much ETH is needed to buy one BTC. Pairs give you an easy way to value assets for trading.
Coins are often paired with major cryptos like BTC or stablecoins like USDT that are pegged to the dollar. You can also trade between crypto and fiat currencies like USD on exchanges. The process is similar, just exchanging assets for government-backed money.
Trading pairs are essential building blocks for analyzing the crypto market. They let you see what a coin could be worth if it reached the market cap of another. Now let's break down the base and quote currency roles.
Base and Quote Currency
Trading pairs, whether they're crypto-to-fiat or crypto-to-crypto, always consist of a "base" currency and a "quote" currency.
As an example, let's consider the trading pair LTC/USDT (Pic. 1). Here, LTC is the base currency, and USDT is the quote currency. If the current trading rate is 101.40, it means you'll need to part with 101.40 USDT to acquire 1 LTC.
When you execute a buy order for the LTC/USDT pair, you're essentially using USDT to purchase LTC. On the other hand, when you set up a sell order, you're selling LTC in exchange for USDT.
Currencies like BTC, ETH, USDT, BNB, and LTC are common pairs due to their significant trading volume, high liquidity, and widespread availability across most crypto exchanges.
But remember, your trading options extend far beyond just BTC, ETH, or USDT. The crypto universe is vast, and major exchanges offer a diverse range of trading pairs. Therefore, you can always discover a pair that perfectly matches your trading requirements.
How Do Crypto Trading Pairs Work
The mechanism of cryptocurrency trading pairs involves gauging the value of one cryptocurrency against another. This comparative approach is used to determine their relative worth. It's somewhat similar to checking out a product's price in a store, which is typically expressed in a specific fiat currency.
What distinguishes this from everyday transactions is that, while most people stick to a single fiat currency for their daily transactions, the world of cryptocurrency frequently involves dealing with multiple cryptocurrencies. In this context, trading pairs play a vital role in establishing the value of a specific cryptocurrency when it is exchanged for another.
Cryptocurrency Trading Pair Example
Jimmy was chilling with his one bitcoin, living the crypto dream. But a FOMO wave hit when he heard about ether’s sweet gains. Jimmy wanted in!
He swaggered over to the exchange, stroking his beard thoughtfully as he checked the ETH/BTC pair. "Not bad, not bad," Jimmy muttered, seeing ETH's current BTC price. He slammed that trade button, swapping half his BTC for ETH.
Now Jimmy was diversified. But what if he only had XRP, not a base pair on this exchange?
No worries! He'd just have to trade his XRP for BTC first, then use his new BTC to buy ETH. Not all coins can cut a rug with each other, ya see.
How to Choose a Crypto Pair to Trade: Crypto Pair Strategies
When choosing a trading pair, look for one that gives you an advantage or edge. Avoid pairs where you may lose money on the trade.
- Exchange
Selecting a reputable, secure, and reliable crypto exchange is crucial: Binance, Coinbase, OKX, and KuCoin all fit the bill. Keep in mind that while centralized exchanges like Binance or Coinbase enable crypto purchases with fiat money, decentralized exchanges (DEXs) like PancakeSwap or Uniswap lack this feature. As a result, trading on DEXs primarily involves crypto-to-crypto pairs or trading against stablecoins pegged to the US dollar, such as USDT, UST, or USDC. Additionally, some altcoins may not be purchasable with fiat money on major centralized exchanges, so you'll need to rely on BTC, ETH, USDT, or other leading cryptocurrencies.
It's essential to verify whether your chosen crypto exchange supports trading your selected currencies and if you can use your preferred currency as a base. If the exchange doesn't allow using your desired cryptocurrency as a base, consider switching to alternatives like BTC/ETH/BNB or explore other exchanges that may offer more options to meet your requirements.
- Trading Volume
Check the trading volume of the pair. Low trading volume means it could take a long time to fill your order. High volume generally leads to faster order execution. Even if a pair looks good profit-wise, low trading volume can outweigh that. It's better to find a pair with decent volume to avoid delays in order execution. Trading volume is an important factor to consider along with potential profit/loss when selecting the best trading pair for your needs.
- Volatility
High volatility in your selected trading pair inherently comes with increased risk. However, this same volatility can also offer more trading opportunities within a given period, and truth be told – volatility can be a trader's best ally if handled with appropriate risk management. If you're uncertain about your trading prowess, it might be prudent to lean towards trading pairs involving cryptocurrencies that have stood the test of time in the crypto market, have a broad user base, significant trading volume, and substantial market cap.
Of course, if you're confident in your selected trading pair and believe you can trade them profitably, there's no cause for concern. But if you're still feeling your way around, opting for coins with comparatively lower volatility might be a smart move.
Diversifying with Trading Pairs
Diversification provides a number of significant advantages in trading and investing.
One primary benefit is risk mitigation, achieved by distributing investments across various assets. This approach allows you to lessen your vulnerability to any single investment's downturn, thereby minimizing potential loss impacts.
Another advantage is the enhancement of portfolio stability and the evening out of returns over the long run. Different assets often exhibit diverse performance trajectories, and combining these in a single portfolio enables you to potentially balance out one asset's volatility with another's steadiness.
Lastly, diversification opens up opportunities for potential growth and takes advantage of differing market circ*mstances. Through diversification, you can strategically position yourself to profit from a range of market scenarios.
How to Trade Crypto Pairs: Crypto Pair Trading
A crypto pairs trade, also known as crypto pair trading, is a market-neutral trading strategy that allows traders to profit from various market conditions: uptrends, downtrends, or sideways movements. This approach is classified as a statistical arbitrage and convergence trading strategy.
The strategy involves monitoring the performance of two historically correlated cryptocurrencies. When the correlation between the two temporarily weakens, i.e., one crypto moves up while the other moves down, the pairs trade would involve shorting the outperforming crypto and longing the underperforming one, betting that the "spread" between the two will eventually converge. The divergence within a pair can be caused by temporary supply/demand shifts, large buy/sell orders for one crypto, reactions to significant news about a project or company, and so on.
The crypto pairs trading strategy, while offering potential profit opportunities, also comes with certain challenges:
- For starters, finding two historically correlated cryptocurrencies that exhibit a temporary divergence can be difficult. It requires a thorough analysis of historical data and an understanding of the factors affecting the correlation between the selected assets.
- Crypto pairs trading also demands constant monitoring of the selected assets to ensure that the positions are adjusted as needed. This can be time-consuming and requires a high degree of attention to detail.
- Finally, while the strategy is considered market-neutral and has limited downside risk, unexpected market events or news can affect the correlations between the selected assets, potentially leading to losses if not managed properly.
Trade Any Crypto Pair with Bitsgap
Bitsgap is a crypto aggregator that connects more than 15 top exchanges into one platform. By linking your exchanges to Bitsgap, you can say goodbye to juggling multiple platforms — trade, research, and maximize opportunities across numerous trading pairs from a single, user-friendly interface.
Features include automated trading bots, charting tools, and manual trading with advanced order types.
The goal is to save time by avoiding the need to toggle between exchanges and guess which pairs to trade. Instead, you can focus more time on trading and market research across exchanges in one place.
Stop guessing and start growing your portfolio. Discover the Bitsgap advantage today.
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Bottom Line:
Assembling tradable assets into pairs serves a dual purpose, benefitting both traders and exchanges. This structuring brings order to the platform and the broader market, as listed assets are neatly paired up. This arrangement allows spot and derivatives traders to map out their trading strategies, monitor price trends, and gather other useful information to aid their trading journey.
Exchanges, particularly centralized ones, can gauge the viability of listed assets through their performance across pairs. Exchanges are constantly aiming to devise strategic pairings of assets to enhance user experience. These tactics could involve pairing assets from rival communities (like the Dogecoin and Shiba Inu trading pair – DOGE/SHIB), or contrasting reputation and relative viability. This strategy not only shortens the path for traders looking to trade related assets, but also brings these intriguing assets together.
FAQs
What to Remember about Trading Pairs Base Currency?
The base currency is like the quarterback of crypto trading pairs. Exchanges rely on base currencies to pair up and trade with other cryptos. Without a base, no trade!
Popular quarterbacks are big name cryptos like bitcoin and ether that exchanges draft as bases. Sometimes exchanges throw in their own native token, like Binance adding BNB to the roster.
The starting lineup of base pairs varies by exchange "league." You've got to check each exchange's trading screen to see which positions they've filled. Look for the base/quote pairs listed — that shows the bases accepted for trading plays.
So scout your exchange to find which base currencies make the cut. They're key to running any trades smoothly!
What’s the Difference between Crypto Pairs?
You've probably noticed the smorgasbord of trading pairs up for grabs on crypto exchanges. They operate in a similar fashion to any other pair, but it's crucial to remember that their value could vary quite a bit.
That's because each pair is like its own little universe with its own set of laws - or more accurately, its own order book. Each has its unique lineup of bids and asks, and depending on the market's mood swings, you might end up paying a pretty penny to trade with these pairs.
Or, if luck’s on your side, you could snag a sweet deal if you can fill a demand gap. However, most of the time, sticking with good ol' reliable BTC for trading might be your safest bet.
What’s the Difference between Crypto-to-Crypto and Crypto-to-Fiat?
Crypto-to-crypto pairs involve two digital currencies, like the popular ETH/BTC pair. If your trading pair includes heavy-hitters like BTC, ETH, or other major cryptocurrencies, you can bet your bottom dollar that this pair will have a bustling trading volume and draw a lot of liquidity on crypto exchanges.
On the flip side, if you opt to trade with less popular altcoins, you'll likely encounter wider spreads and lower trading volume. This is due to their smaller market capitalization and lower popularity in the crypto marketplace.
Crypto-to-fiat pairs are often the go-to for rookies just dipping their toes into the crypto trading pool or those who still find crypto-to-crypto pairs a bit of a head-scratcher. In this pair, one side is a digital asset and the other is a fiat currency (e.g., USD, EUR, etc.).
Most crypto-to-fiat pairs have USD as their base currency. This is because the good old US Dollar is the yardstick by which the entire crypto market is measured.
What Cryptocurrency Pairs Can Be Selected for Arbitrage?
Arbitrage in crypto trading involves taking advantage of price differences between different exchanges to make a profit. It's a commonly used strategy that can be manually executed or automated through dedicated crypto trading platforms. If you're executing arbitrage manually, you could theoretically use any pair, but some platforms reportedly use fiat pairs to simplify and expedite the process.
Is There Any Correlation between Cryptocurrency Trading Pairs?
The answer is, sometimes. Some cryptocurrencies and pairs do have a certain price correlation where they follow each other but not always. Since Bitcoin is so tied to the entire cryptocurrency market many of them tend to follow it, but sometimes there is some deviation.
This can be particularly true if you’re using a pair or exchange which has a very small number of traders. In these cases, almost all of the demand can be totally held within the BTC base currency, leaving little liquidity for other pairs. Low liquidity can cause strange price movement, and you should be aware of this when trading.
