Trading cryptocurrency is a little different from trading other assets like stocks or commodities. While in most cases operations are much the same, and even indicators can be reused, there is one major difference which throws a lot of people at first.
Cryptocurrencies are not typically traded against US dollar (or any fiat currencies) like commodities and stocks are. They are actually traded against other cryptocurrencies, and if you don’t know anything about pairs then you could be quite confused.
In this article, we’ll be talking about crypto trading pairs and explain how they work. We’ll also help you to decide which trading pair you should use and how arbitrage works in regards to trading pairs.
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What is a cryptocurrency trading pair
When trading a cryptocurrency on an exchange you’ll be using a trading pair. In most cases, people will be using BTC to trade against, but there are actually many trading pairs that you could use!
When you see the value of a cryptocurrency displayed it is usually that cryptocurrency’s value as compared to the price of Bitcoin. In other words, how much of that cryptocurrency you could get for one Bitcoin.
How do crypto trading pairs work
Cryptocurrency trading pairs work by comparing the cost of one cryptocurrency to another. This is used to establish value. It’s not a big difference compared to going to a store and seeing that a product is worth of a certain amount of fiat currency.
The only difference here is that most people don’t use multiple fiat currencies to transact in their everyday lives like we do with cryptocurrency. Trading pairs help to establish the value of an asset when it’s traded for another asset, that’s it.
Cryptocurrency trading pair example
Jimmy currently owns one Bitcoin, but he’d like to purchase Ethereum instead. He goes to the exchange and selects an ETH/BTC trading pair. The exchange displays then what the current value of Ethereum is compared to Bitcoin. Jimmy agrees with this value and submits a trade to sell half of his Bitcoin for Ethereum.
Jimmy was able to do this because he already held BTC, which was a base trading pair. If he was holding XRP instead but it was not a trading pair on his exchange, then his trade would look different.
First, he’d need to trade XRP/BTC to get some Bitcoin, and then he could perform the ETH/BTC trade to trade his Bitcoin for Ethereum. Remember that while an asset may be listed on an exchange it does not mean that you can directly trade it for every other cryptocurrency on that exchange.
Sometimes you need a “pass-through” currency in order to make trades work. If you’re not sure, then trading for Bitcoin is the most foolproof way, as it’s a trading pair almost everywhere, with the exception of a few Ethereum based token exchanges.
What’s the difference between crypto pairs
You’ve likely noticed that there are many different trading pairs on cryptocurrency exchanges. They work much the same way as using any other pair, but you should be aware that the value could actually be much different for each pair.
That’s because every pair has essentially its own order book. It has its own bids and asks, and depending on demand you could actually be paying a premium to trade with these pairs, or perhaps getting a good deal if you can fill a demand. Nine times out of ten you’d be better off trading using BTC though.
How to choose a crypto pair to trade
When choosing the best trading pair you should make sure that you choose the one that’s offering you an advantage. Make sure that you’re not losing money on a trade, and make sure to take the current trading volume into consideration.
If a trading pair has little trading volume then you could be sitting on a trade for a very long time before it goes through. This could impact your decision to use a certain pair even if you would come out ahead on the deal.
Trading pairs base currency
Base currency is the one that has been established as a common trading pair on exchanges. For only crypto exchanges, you’ll need to have one of these pairs before you can actually trade. In most cases, these are the most popular cryptocurrencies that you could buy.
They typically include Bitcoin and Ethereum, but sometimes exchanges also have other options, including their own base currencies! This could include things like Binance’s BNB, which is their native token.
Accepted base currencies varies from exchange to exchange and you’ll need to verify for yourself which ones they accept. This is easy enough to do on your account page if you go to the trading screen. You’ll see on the exchange which base currency pairs they have available.
What cryptocurrency pairs can be selected for arbitrage
When doing arbitrage on Bitsgap you’ll actually need to trade a cryptocurrency against a fiat trading pair. That means you can use ETH/USD, LTC/USD, XRP/USD, EOS/EUR, etc.
If you’re doing it manually, then you could technically use any pairing, but Bitsgap uses fiat currency pairs to make it easier to execute fast trades. This can secure you much better profits and using an automated software like ours is a better route to go despite this limitation.
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.