Cryptocurrency has experienced significant growth in recent years and is now a trillion-dollar industry. Besides Bitcoin and Ethereum, many other options have emerged, including non-fungible tokens (NFTs) and decentralized finance (DeFi) tokens, while the underlying blockchain technology has also developed. Just as U.S. dollars can be exchanged for euros (and other currencies), it’s possible to trade one cryptocurrency for another. Pairs trading enables investors to make a profit from market movements while minimizing exposure to systematic risk.
Exchanges use crypto pairs to facilitate the exchange of tokens between buyers and sellers. A trading pair, such as ETH/BTC, depicts two cryptocurrencies that can be traded on an exchange for one another; each pair indicates the value of one coin relative to another. Depending on the time frame, the price can exhibit a trending pattern or oscillate within a limited range. ETH/BTC can be traded on almost all crypto exchanges, so you don’t need fiat currency as an intermediary. The ratio can be determined by dividing ETH’s USD price by BTC’s USD price.
The Most Versatile Crypto Trading Pairs Are BTC And ETH
Bitcoin is the most-traded cryptocurrency. Its deep liquidity and established market infrastructure make it an appealing option to both retail and institutional investors. Traders can enter and exit positions relatively quickly. Ethereum comes in second place after Bitcoin in terms of market size. You can purchase Ethereum or use ETH trading pairs on nearly all major crypto exchanges. ETH trading pairs, especially those that involve stablecoins like USDT, are highly liquid, meaning numerous buyers and sellers are readily available.
Bitcoin and Ethereum are the two most established cryptocurrencies, so they’re actively traded and have sufficient liquidity to streamline transactions. Liquidity is a critical factor because it reduces slippage and ensures your trades are executed closer to your intended price point. The ETH/BTC trading pair reveals Ethereum’s value in terms of Bitcoin. BTC remains the most prominent cryptocurrency, with a market capitalization of $2,202.11 billion USD and the world’s de facto reserve currency.
Deconstructing Crypto Trading Pairs: Base, Quote, And Beyond
Exchanges make multiple pairing options available, so you can choose a crypto trading pair based on the assets you already possess. When ETH/BTC appears on an exchange, it means you can swap Ethereum for Bitcoin – and the other way around – directly on the platform.
Suppose you want to trade Dogecoin for Shiba Inu. If the exchange you’re using doesn’t support that trading pair, you must trade Dogecoin for Bitcoin and then exchange that amount of BTC for Shiba Inu.
Every crypto trading pair consists of two parts:
- The base currency: It’s the asset you’re buying or selling. Popular cryptocurrencies like Bitcoin and Ethereum serve as base currencies, but the accepted base currencies can vary from one exchange to another. The base currency is listed first.
- The quote currency: It’s also known as the counter currency. Basically, it’s the currency you’re using to buy or sell the base currency. For example, in a BTC/ADA pair, ADA is the quoted currency, and its price indicates how much ADA is needed to purchase one BTC.
If you seek lesser-known cryptocurrencies for investment, you must own one of the base currencies listed on an exchange before you trade. When choosing trading pairs, consider how easily you can buy or sell and what activity the pair sees. ETH/USDT or BTC/USDT are more predictable and easier to analyze compared to others. Obscure tokens that don’t have too many supporters immediately lose market positions. Hence, they’re not a good destination for your capital.
Savvy Investors Can Exploit Arbitrage Opportunities
You can capitalize on price discrepancies in the crypto market by acquiring a token at a lower price in one market and transferring it at a higher price in another. In other words, you buy a digital asset at a lower price on one exchange and sell it at a higher price on another. You need accounts and funds on multiple exchanges, not to mention that you have to act quickly since price differences are fleeting.
Selecting a crypto pair to implement an arbitrage trading strategy can be tough because some coins are more correlated with one another across exchanges than others. Correlation often declines when using trading pairs with limited trading volume. This creates liquidity, which in turn creates an opportunity for arbitrage. Arbitrage trading can be risky, so use automated tools for faster execution and diversification across multiple exchanges. You should begin with small amounts of capital to understand market dynamics.
Use Technical Analysis To Make Informed Decisions
Many traders use technical indicators, such as the Relative Strength Index (RSI) and moving averages, to identify trends and patterns in the crypto market. Use technical analysis to determine the best and worst time to enter and exit a trade. By combining technical analysis with fundamental analysis, you can create a more robust trading strategy that increases your chances of consistent profitability. You can sleep better at night knowing you’ve made the right decision.
Reduce Potential Losses When Trading Crypto Pairs
The risk of losing money occurs when you open positions. When trading pairs, the ratio between cryptocurrencies can alter all of a sudden due to market sentiment. Even if one of the assets in the pair has stabilized, there’s still the risk of significant losses. Success depends on understanding both sides of the pair. You’re familiar with Bitcoin and Ethereum but might be oblivious to the factors that affect the altcoin coupled with them. Robust risk management helps you safeguard your investment capital.
A stop-loss order can act as a safety net, mitigating the financial impact of unfavorable market conditions. Set stop-loss orders based on technical analysis and support levels. You can usually adjust or modify a stop-loss order if it hasn’t been triggered yet. Margin trading can lead to considerable losses if not managed properly. Leverage can boost gains, but it also exaggerates losses. A smaller borrowed amount reduces potential losses.
Concluding Remarks
Exchanges have responded to the demand for supporting as many pairs of cryptocurrencies as possible. There’s also an abundance of stablecoins. If you’re sure about your chosen trading pair, you have nothing to be worried about. If you don’t have enough experience with trading, stick to cryptocurrencies with relatively lower volatility.
