What are crypto trading pairs?
When two different digital crypto assets are compared to each other instead of using an exchange medium like fiat, we call it a crypto pair. Whenever you are trading on a centralized or P2P exchange, you will see that assets are often shown as BTC/USDT. It means that the base asset — Bitcoin — is compared against Tether and the price is denominated in USDT.
A crypto pair is a useful tool for traders. It allows them to swap one asset for another without using any additional operations.
Some advantages of using crypto pairs:
- Lower fees. Whenever you conduct a financial transaction on an exchange, you have to pay commissions, spreads, or other small charges. Using a crypto pair allows exchanges to eliminate unnecessary trading operations.
- Triangular arbitrage. If you plan to use some form of crypto pairs trading software, launching a triangular arbitrage bot is a good idea. It allows traders to monitor the prices of three assets at a time to identify moments when prices diverge allowing them to make a profit by exchanging one asset for another while simultaneously trading one of them against the third one. It allows retail traders to make money consistently.
- Readability. It can be quite hard for traders to compare various assets against each other by using a single reference point. If you want to know how many ETH coins you can buy with a certain amount of BTC, you can simply look at the pair instead of comparing USD prices to each other and making a ton of calculations.
- Liquidity. Cryptocurrency pairs are sources of liquidity for all exchanges since they don’t have to rely on their fiat reserves to conduct traders by pairing various digital assets directly to bypass the necessity to use USD or another fiat. It means that liquidity is always quite high and traders do not have issues with doing their business as usual.
Since the inception of stablecoins like Binance USD, Tether, and USDC, many traders can quickly swap their digital assets for analogs of fiat money without using real currencies. It is an easy way for newcomers to understand the values of various assets without spending time on unnecessary calculations and estimations using a single reference currency.
How do trading pairs work?
If you want to sell your digital assets and buy another type of asset, you need to simply find a corresponding pair. For example, you want to buy BTC for ETH. Search for BTC/ETH pair and look at the price. If you were to use an exchange medium, you would have had to sell ETH for USD and buy BTC for USD afterward. It is more expensive and tedious than just swapping one asset for another.
Some exchanges experiment with “exotic” pairs that compare different types of assets to each other. These pairs may involve NFTs, exotic coins, platform-specific tokens, and more. You may try to work with these instruments, but the level of liquidity is usually low, and finding a good trade can be challenging.
How to read crypto trading pairs
The first asset in the pair is called the base currency. It means that this particular asset will be compared against a reference currency which you need to pay to buy the base asset. The second part of the pair is the reference asset. All prices denominated in US dollars are pairs as well, but we do not perceive them as such due to the long exposure to a single exchange medium.
For example, when you see BTC/USDT valued at $20,000, it means that you need to pay 20,000 units of USDT for a single BTC. The “/” separator means that the first asset is compared against the second. Otherwise, you could write it down as 1/20,000.
Since some digital assets may have unique denominations, you may see prices vary dramatically. A single DOGE will be priced at a tiniest fraction of BTC requiring users to trade in bulk whether they want it or not.
Crypto pairs trading example
Imagine that you want to buy 1 BTC, but you have ETH. Go to an exchange that you like and trust to look for the particular BTC/ETH pair. Let’s assume that the price is 12 ETH for 1 BTC. You may cross-reference prices to any exchange medium that you are most familiar with. For the vast majority of traders, this medium is the US dollar.
In our example, BTC is priced at $20,000 USDT and ETH is priced at $1,600 USDT. Exchanging these assets directly would bring you a 0.5 ETH profit due to the discrepancy in USDT prices (buying 1BTC for 12 ETH will mean that 1 ETH equals $1,666 USDT in our example). It is a high-value deal.
Due to price convergence, these situations occur rarely, but you may take advantage of such moments using triangular arbitrage.
What is cryptocurrency pairs trading?
When you don’t use fiat to purchase tokens for long-term holding, any operation that you perform on an exchange is effectively trading pairs. The concept is quite easy to grasp, yet it takes dedication and effort to find strategies that work for specific trading pairs since they involve different digital assets that do not have the same value when compared against a reference currency.
Contemporary crypto pairs trading strategies usually have a variety of permutations and can be used for different purposes depending on your overall investment system. We will talk about some approaches widely regarded as efficient and reliable by the crypto community.
Cointegration pairs trading
This particular system deserves a whole separate guide, but we will give you a short overview and talk about its advantages. The cointegration idea was developed by a Nobel Prize winner economist Clive Granger back in the 1980s. It was a revolutionary idea that started taking over financial markets at the beginning of the 21st century.
Cointegration is not opposed to correlation, but it has many important differences. The idea behind the method is that some assets have prices that are tied and follow the same patterns. Using them in your trading strategy is generally a good idea since these assets often have similar risk profiles and can be used in a variety of financial operations.
Correlation assumes that assets have similarities in returns, which is not true when it comes to cointegration. Some new-age traders believe that the term is somehow related to coins and tokens, but the main word here is “integration”. Assets that are cointegrated demonstrate similar price action and share other behaviors allowing traders to open beneficial market positions.
When it comes to pairs trading, cointegration is an excellent analytical approach since you have all the necessary data to identify pairs of assets that behave similarly and can be exploited.
Pairs trading: options and other derivatives
Cryptocurrency pairs open the gates to a world of financial instruments for experienced retail traders. Derivatives are assets based on other assets. Most retail traders are closely familiar with two types of such instruments:
- Futures. These contracts are obligations from two parties to conduct a certain type of trade at a specific moment in the future. Sellers must deliver any goods, services, or digital assets tied in the contract and the holder of the contract must pay the price specified in it.
- Options. These contracts allow buyers to buy a certain asset at a certain price at any moment throughout the contract.
Both financial instruments are traded using leverage. It means that buyers often have to rely on loaned funds to trade. It can be extremely dangerous for some portfolios since you can be “margin called” which means that your market position will be closed if you do not have enough money in your margin trading account.
Another interesting fact about derivatives is that their prices may not be correlated with the prices of underlying assets. Bitcoin may start falling in January, but May futures can stay strong or even go up in price depending on the overall situation in the market.
If you want to use a piece of advice in crypto trading pairs for dummies, here it is: do not try trading derivatives until you have a solid strategy in mind. Using margin accounts can be extremely dangerous for inexperienced investors.
How does trading cryptocurrency pairs work if you use automation?
One of the biggest advantages that modern retail traders have is the power of automation. While it can be used to simply purchase and sell certain assets for fiat, a pairs trading algorithm is a must-have for any contemporary investor trading on any exchange. Some retail traders use automated systems provided by companies like WunderTrading and 3Commas to copy other investors or run DCA buying bots.
But what are trading pairs in cryptocurrency when automation is involved? There is a fruitful field for exploration and experimentation. Bots can be extremely powerful and can generate profits consistently if you have a reliable strategy. The variety of financial instruments you can interact with is simply astonishing.
The foundation for any automated trading system (ATS) is a technical analysis strategy deployed on a service like TradingView. Other terminals and platforms can be used too. Retail traders utilize a wide spectrum of pairs trading strategy models. Some of them are more complicated than others. You don’t necessarily need any technical expertise in the field of technical analysis, but it is advantageous to have some skills.
Here are a couple of simple pairs trading strategy examples:
- RSI. The relative strength index is a popular analytical tool used by most traders. It works well for beginners and experienced investors. RSI is represented by a line that fluctuates between 0 and 100. It shows whether the asset is oversold or overbought. How do trading pairs work when you use RSI? When an asset is sold too much against another asset, the RSI goes up indicating that there will be a change of direction in price action. The rule of thumb is to sell when RSI reaches roughly 70 and buy when it hits roughly 30.
- MACD. It is another relatively simple instrument. The indicator has two main lines you need to worry about (1) the MACD line and (2) the Signal Line. How to use MACD in crypto trading pairs is explained in just a couple of sentences: when the main line crosses over the signal and stays above, it may be a good moment to short an asset; when the main line crosses the signal and stays below it, the market may be preparing for a bullish movement.
The world of technical analysis has many more interesting strategies and systems that you can try, but it is important to stay focused and use strategies that you can easily understand. Examples of methods for trading crypto pairs explained previously are oversimplified. Of course, you need to use them only when you fully understand how these instruments work.
What are crypto trading pairs with bots?
A bot is a script that instructs an exchange on what to do based on specific inputs defined by users. Companies like WunderTrading provide a rich catalog of highly specialized automation products that cater to retail traders interested in trading pairs meaning that any strategy can be automated.
How do trading cryptocurrency pairs work with automation?
To start using bots, you will need to have several tools at your disposal:
- Create an account at TradingView and find a suitable strategy. Some of the methods for cryptocurrency trading pairs explained previously will work excellently.
- Choose a company that will provide automation services. WunderTrading, CryptoHopper, and 3Commas are all good choices.
- Create an account at a centralized crypto exchange (CEX) that has an API. Binance, KuCoin, Kraken, and plenty of other platforms will do just fine.
- Launch a new bot following instructions provided by the automation platform. Run it for cryptocurrency pairs that you work with.
How do crypto trading pairs work when performed by bots?
The efficiency and results depend on a myriad of factors, but the main one is which strategy you employ and how you control risks. Below are several tips for people who want to try using bots:
- Do not allow automated trading systems to use more than a certain portion of your portfolio. It is important to have a separate account for bots. Dedicate no more than 30% of your total assets to automation.
- Make sure to instruct bots to place stop-loss orders according to your risk tolerance. Even the best technical analysis strategy will have many failures in the long run.
- Work with companies that have a good reputation and a strong track record. Check their uptime and the diversity of available products.
- Choose TradingView strategies highly rated by users to ensure that they won’t produce results that will be less than optimal.
These tips will help you avoid some pitfalls that many newcomers run into at the beginning of their investment journeys.
What do trading pairs mean in crypto?
Some people believe that the only viable strategy for a crypto investor is to buy and hold assets until they appreciate them. While this approach may work in the long run, the length of the “long run” can be too much for an average retail trader. Those who are interested in making money right here and right now must focus on trading digital assets regularly.
Using only fiat currencies to maintain a certain rate of return is not a good idea for investors running dynamic portfolios. You need to keep up with the market and follow strong trends to ensure that your overall asset balance remains high and that your coins do not depreciate.
The core idea behind every single successful trading strategy is to achieve consistency. It is possible by only engaging with the market using fiat currencies, but you won’t have as many opportunities to make a favorable deal or quickly swap assets when the time is right.
What are trading currency pairs for newcomers?
In essence, the difference between retail trading in general and working with crypto pairs does not exist. Alternatives are niche approaches like buying and holding or focusing on derivatives exclusively. The vast majority of retail traders are focused on working with various pairs and trying to identify assets that they can understand.
Beginners should stay away from more complicated investment instruments like staking, participating in staking pools, or working with derivatives. These fields require intensive preparation, studying, and knowledge acquisition. Many people who do not have any prior exposure to the crypto industry won’t be able to effectively use these investment tools.
On the other hand, trading pairs is intuitive and simple. Technical analysis is a crucial skill that you will need to learn at least entry-level to make informed decisions. Focusing on understanding how to trade cryptocurrencies efficiently is the best course of action for newbies.
Cryptocurrency pairs are excellent financial instruments for people who want to start trading crypto. These are direct comparisons between multiple digital assets. If you study them for a while, you will start noticing connections and relations that occur in the industry naturally. You will start understanding how prices behave and why they change course.
It is important to focus on learning more about varying digital crypto assets to understand which investment opportunities will be the most profitable.