What Are Trading Pairs in Cryptocurrency?
In cryptocurrency, “trading pairs” or “cryptocurrency pairs” are assets that can be traded for each other on an exchange — for example Bitcoin/Litecoin (BTC/LTC) and Ethereum/Bitcoin Cash (ETH/BCH). Trading pairs lets you compare costs between different cryptocurrencies.
In the cryptocurrency universe, “trading pairs” or “cryptocurrency pairs” are assets that can be traded for each other on an exchange. Two examples of trading pairs are Bitcoin/Litecoin (BTC/LTC) and Ethereum/Bitcoin Cash (ETH/BCH). There are two main reasons for investors to understand trading pairs: Some cryptocurrencies can only be bought with other cryptocurrencies, so knowledge of cryptocurrency pairs is necessary to expand your crypto holdings beyond the most common coins; and, knowledge of crypto trading pairs gives savvy crypto investors the chance to exploit arbitrage opportunities — the chance to profit from differences in asset prices between markets.
How Do Crypto Trading Pairs Work?
What Is a Base Currency and Why Is It Important?
Which Cryptocurrency Pairs Aid in Arbitrage Opportunities?
How Do Crypto Trading Pairs Work?
Cryptocurrency pairs allow you to compare costs between different cryptocurrencies. These pairings help illustrate the relative worth of coins — for example, how much Bitcoin (BTC) equals in Ethereum (ETH) and how much ETH equals in Bitcoin Cash (BCH). Exchanges usually offer several pairing options, giving you the chance to choose a pairing based on currencies you already possess. For example, if you own BTC, then you have the opportunity to trade with any pairing listed on an exchange that includes BTC.
Some crypto exchanges do not offer pairings for cryptocurrencies and fiat currencies like the U.S. dollar (USD), but exchanges like Gemini, Coinbase, Binance, and Kraken do offer fiat trading pairs. As they have the most exchange options, the most versatile cryptocurrency pairs to trade are usually BTC and ETH.
What Is a Base Currency and Why Is It Important?
To fully take advantage of crypto trading pairs, you need to understand base currencies. A base currency is a way to denote an agreed-upon value of different assets. Base currencies are a common tool for comparing exchange rates across fiat currencies in different countries. An American traveling to Italy will want to convert USD into the Italian currency, the Euro. In this case, the USD serves as the base currency. The same principles apply to crypto assets.
If you’re seeking a lesser-known crypto on an exchange, you’ll likely need to own one of the base currencies listed in a pair before you can trade. In most cases, the most popular cryptocurrencies (BTC, ETH) serve as base currencies, but accepted base currencies will vary for each exchange. Before diving into trading pairs, investors should confirm which base currencies are accepted at their exchange of choice as well as which trading pairs the exchange offers. In addition, many exchanges offer stablecoin trading pairs, usually pegged to USD. These stablecoins may hold one-to-one physical reserves of USD or use another mechanism such as DAI.
Which Cryptocurrency Pairs Aid in Arbitrage Opportunities?
Choosing cryptocurrency pairs to implement an arbitrage trading strategy can be complicated. Some cryptocurrencies are more correlated with one another across exchanges than others, and arbitrage opportunities arise when correlation is low. BTC is the most widely traded digital asset and the most integrated into the cryptocurrency market. However, correlation tends to decrease if you’re using trading pairs with limited trading volume or trading on an exchange that isn't widely used. This creates illiquidity in the market, which in turn creates an opportunity for arbitrage. In general, arbitraging cryptocurrency trading pairs is a fairly advanced trading strategy and not recommended for novice cryptocurrency traders.
