What are cryptocurrency trading pairs?
Crypto trading pairs are exactly what they sound like; it refers to a duo of crypto assets that can be swapped for one another. In terms of crypto trading activities, trading pairs are the bread and butter.
If you want to learn more about crypto trading, check out our Beginners Guide 2024.
For example, if you aim to exchange Tether (USDT) for Bitcoin (BTC), you would be engaging in a USDT/BTC trading pair. In this example, USDT presents the base currency while Bitcoin assumes the role of a quote currency.
In simple terms, you are essentially buying one digital asset while simultaneously selling the other one. Trading pairs are crucial when it comes to the analysis of the cryptocurrency market and current market conditions.
A cryptocurrency exchange pair has its own trading mechanisms which measure its value. It utilises a comparative method that measures the relative value of a certain product and its relative prices.
Coins are typically paired with major cryptocurrencies such as Bitcoin (BTC) or stablecoins like Tether (USDT) that are pegged to a fiat currency on crypto exchanges.
When looking at popular cryptocurrencies, Bitcoin (BTC) and Ethereum (ETH) take the lead since they are supported by most exchanges. Additionally, many exchanges provide pairings with both cryptocurrencies and traditional fiat currencies such as the U.S. dollar (USD).
Two main categories of trading pairs
Before delving into the crypto trading space, it is important to understand key differences between two fundamental categories of crypto trading pairs; you can either trade crypto for a fiat currency or trade one cryptocurrency for another one.
Crypto-cross pairs
Crypto-cross pairs include two digital assets such as the BTC/ETH pair. When you spot trading pairs that feature major cryptocurrencies such as BTC, ETH, LTC, or some other well-known cryptocurrency in your trading pair, likely, you will also see a high trading volume and liquidity on many crypto exchanges.
This is because major crypto assets enjoy a substantial degree of popularity within the crypto community. The more traders are involved, the fewer complications could happen with a crypto-cross trading pair.
On the other hand, if you choose less-liquid altcoins, you could face lower trading volumes and wider spreads due to reduced popularity and a lower market cap.
Fiat-to-crypto trading pairs
In a fiat-to-crypto trading pair, you have a digital asset on one side, and a fiat currency like USD or EUR on the other. Fiat-to-crypto trading pairs are typically favoured by traders that just entered the crypto space.
Many fiat-to-crypto trading pairs include USD as their base currency since it is recognised as a benchmark fiat currency for the entire cryptocurrency market.
Base and quote currency explained
If you want to know how to read a crypto trading pair, you need to understand its two main parts – the base currency and the quote currency. Reading a crypto trading pair is easy so let’s break a crypto trading pair into parts.
Crypto trading pairs are generally represented with a set of three letters with a backlash; for example, it always looks like AAA/BBB.
The first currency in a trading pair is always the base currency. It takes the lead and serves as the reference against which the other currency is valued. For instance, if you look at the fiat trading pair EUR/USD, euro is the base currency. In the BTC/ETH case, Bitcoin is the base currency. Bitcoin and Ethereum are the most common base currencies; however, the bigger the exchange the more trading pairs it provides.
A base currency is a way to denote an agreed-upon value of different assets; they present a common tool for comparing exchange rates across fiat currencies worldwide.
The second part is the quote currency or the value of the base currency expressed in the terms of the second currency. In the BTC/ETH trading pair. Ethereum assumes the role of a quote currency, and in the fiat EUR/USD pair, the U.S. dollar is the quote currency.
In other words, these pairs are here to show you how much of the quote currency is needed to equal one whole unit of the base currency.
What is the purpose of crypto trading pairs?
Crypto trading pairs are a significant part of every trading strategy and the whole crypto market. A cryptocurrency pair enables each digital asset in that pair to be valued without using fiat money.
For example, if you are based in the United States and decide to travel to Germany, you will have to research the exchange rate of the euro against the U.S. dollar to be able to plan your vacation. It is the same with crypto exchanges; platforms provide a wide array of trading pairs and users can easily exchange one cryptocurrency for another.
Another benefit of understanding crypto trading pairs is related to trading fees. Simply put, if a crypto trading pair didn’t exist, a user would need to use at least two cryptocurrency pairs to get the desired cryptocurrency as well as pay higher fees.
If you are new to the crypto trading space, remember that knowledge is the key. We suggest reading this article to get a grasp on trading pairs: 'What are crypto price charts?'.
Most popular crypto trading pairs
We have already explained that the most popular crypto pairs are those that involve major cryptocurrencies such as Bitcoin, Ethereum, Ripple, Litecoin, or any other of the top cryptocurrencies by market capitalization.
Additionally, the crypto trading volume also seems to be trending toward fiat base pairs and the stablecoins pegged to them. However, there are many other cryptos available on the market so there is a wide range of pairs to choose from.
How do crypto trading pairs work?
The crypto pair trading activity refers to a market-neutral strategy that enables traders to profit from divergent conditions in the crypto market such as uptrends, downtrends, or sideways movements.
The cryptocurrency trading mechanism includes calculating the value of one cryptocurrency against another to determine its relative worth. It is similar to examining a product’s price in a traditional store, which is expressed in fiat money.
However, it differs from regular everyday transactions because the crypto space includes dealing with multiple digital assets. That is why trading pairs play a significant role in determining the value of a certain cryptocurrency when it is being exchanged for another.
Think of the functionality of crypto pairs as a symbiosis of economic strategies and technological innovations. Both are put to work in creating pairing systems for both centralised and decentralised exchanges.
To purchase the base currency, a trader needs to have the quote currency in possession. Traders determine the price at which they aim to buy and the amount of the quote currency they want to put in for the trade. Sellers indicate the price of the base currency and the number of assets they want to sell.
On centralised exchanges (CEXs), order books are set out to support both assets. Sale requests are typically arranged in ascending order while buy orders are laid down in descending order.
As for decentralised exchanges (DEXs), the pairing structure is managed by Automated Market Maker (AMM) protocols and the liquidity pool. The liquidity pool’s design accepts two paired assets, and the AMM deals with trade requests and updates the sale price of the base currency after a trade.
How to choose a crypto trading pair?
Pair trading refers to a non-directional trading method; simply put, you can apply this strategy in relation to the crypto market moving up or down and examine how these two assets perform against each other.
Crypto pair trading requires a substantial level of knowledge and careful monitoring of market conditions, along with an understanding of the dynamics between the selected pairs.
You can start by checking our Learn Crypto Academy and select a desired course to attend.
Therefore, trading crypto pairs isn't always as simple as it is presented. Education is the key, and users need to take some time to learn about analysis types, trading options techniques, and risk management practices. This doesn't constitute trading advice, but we have prepared a few beginner-friendly tips to help you navigate the crypto space more efficiently.
Choose a crypto exchange
Picking the right exchange is the first step – look for a cryptocurrency exchange that is reliable, secure, and supports the cryptocurrencies you aim to trade.
Centralised exchanges allow users to buy cryptocurrencies with fiat money, but decentralised exchanges don’t have that feature; the only way to trade on DEXs is to use crypto-cross pairs or stablecoins that are pegged to the US dollar.
Check the trading volume
Trading volume presents the number of trades conducted in a specific trading pair over a certain period. A high trading volume usually involves a higher level of liquidity and an active market.
If you choose, for example, a pair with a low trading volume, it will take a lot of time before you will be able to conduct a trade. This scenario typically happens with some altcoins that might not be profitable when compared to popular cryptos.
High-volume pairs are more attractive to users because they provide a quick execution of trades. Pairs with a low volume can suffer from slow trade execution and wider spreads which can affect the whole trading experience.
Don't forget about liquidity
We use liquidity to measure how easily a digital asset can be bought or sold without affecting its price significantly. If a crypto pair has high liquidity, it means that there is a minor difference between the buying and selling price.
Therefore, high liquidity means that you can trade assets close to the current market price. On the other hand, trading with low liquidity pairs can be a challenging task as not many traders would be willing to match the desired price.
Pay attention to volatility
The crypto market is known for its volatility. It refers to the level of price fluctuation in a cryptocurrency trading pair. A higher degree of volatility encompasses broader swings which can lead to either big gains or losses.
Volatility can be a friend or foe, depending on the trader’s level of knowledge and risk management approaches.
If you are not an experienced trader or you prefer more secure methods, you might want to focus on crypto pairs with a lower level of volatility. Major cryptos such as BTC and ETH typically include more stable prices compared to newer altcoins.
