A Comprehensive Guide on Cryptocurrency Pair Trading
The crypto market is one of the most traded financial markets with over 2 000 assets with different prices, capitalization, trading volumes, and popularity. The enormous growth in the cryptocurrency sector has been attributed to investors’ increase in the crypto space, pushing up digital assets’ value.
In financial markets, pair trading is a trading strategy that involves analyzing market trends and performing statistical calculations to enable traders to make profitable decisions based on market conditions, i.e., downtrend, uptrend, or sideways movement. Cryptocurrency pair trading is different from trading other financial assets such as forex, commodities, or stocks. In crypto pair trading, value is established by comparing the cost of one cryptocurrency for another. Here’s an in-depth look at crypto-to-crypto trading pairs and how they work.
Cryptocurrency Trading Pair Explained
In crypto trading, the term “trading pairs” refers to trade between one coin to another. For instance, the “trading pair” ETH/BTC implies that you can obtain Bitcoin using Ethereum or sell Ethereum for Bitcoin.
Crypto trading pairs enable crypto traders to trade cash for cryptocurrency and trade cryptocurrency for cryptocurrency on a “coin to coin” exchange. The perks of crypto to crypto exchange are numerous so are the downsides. For a start, unlike fiat currencies, which are quite stable, cryptocurrencies are very volatile. Therefore, when exchanging two cryptos, you have to consider the two assets’ prices and the possibility of gaining or losing value based on the market conditions.
For instance, you’re exchanging $ 100 worth of ETH and $ 100 worth of BTC, and then ETH drops in value by a dollar and BTC increases in value $ 1, you will go at a loss if you trade ETH for BTC. However, there is a possibility of profiting if you trade BTC for ETH. The coin price movements mean that you can either make a profit or loss when exchanging cryptos for cryptos.
In the crypto market, trading pairs are ideal for comparing a particular cryptocurrency value with the other. In most instances, BTC is used to compare the value of other cryptos as it’s the standard measure of value in the crypto space. The valuation of a particular cryptocurrency also involves statistical experiments (correlation function of statistics) and analytical results analysis. Crypto trading pairs function to establish the value of an asset when it’s traded for another asset.
Benefits of Crypto Pair Trading
Pair trading in cryptocurrency comes with numerous benefits for both the crypto market and the traders. Here are the benefits of crypto pair trading.
- Better Trading Opportunities– Pair trading in cryptocurrency offers better trading opportunities. The value of crypto tokens varies depending on the country. For instance, while BTC is quite valuable in America and Europe, it comes fifth in China, with EOS being the most beneficial. Therefore, cryptocurrency pair trading enables traders to exchange value based on their locality.
- Maintains Market Balance– Pair trading in cryptocurrency maintains market balance, which is crucial for overcoming downside risk. Pair trading enables crypto investors to exploit other means or strategies of generating profits in the crypto space. Pair trading is also a market-neutral trading scheme with minimal investment risks.
- Develops the Crypto Market– Cryptocurrency pair trading goes to greater lengths in designing the crypto market. This type of trading enhances the value of the cryptocurrency market and attracts potential investors. As a result, the value of “unknown” tokens grows as traders exchange them with more valuable coins such as BTC.
Risks Associated with Cryptocurrency Trading Pairs
Like any form of financial pair trading, crypto pair trading carries significant risk, which could easily compromise one’s investments. Some of the dangers of pair trading include:
- Unstable Price Movements- As mentioned earlier, crypto pair trading carries significant risks due to digital assets’ volatile nature. Pair trading is also dependent on some theoretical aspects such as probability, correlations, and statistics. An unstable price movement occurs when there is a breakdown in the correlation between a pair of cryptocurrency. Also, the pairs’ price depends on the market and changes rapidly based on various factors.
- Long-Term Investment- Crypto pair trading is a long-term investment, meaning traders need to hold their crypto assets for a longer time to make substantial profits. Few traders can manage to keep their trades for a longer time. Besides, there are significant challenges and risk factors in storing crypto assets.
Choosing the Best Cryptocurrency Trading Pairs
Cryptocurrency trading involves technical and fundamental analysis. While these analyses are crucial for entering the crypto market, choosing the best crypto trading pair is necessary for making lucrative profits. If you select the wrong pair, you can easily make losses or generate insignificant profits.
To choose an ideal cryptocurrency trading pair, you first need to determine the pairs’ popularity on crypto exchanges. Popular crypto trading pairs are BTC/ETH, BTC/LTC, USDT/BTC, and ETH/LTC. Usually, the popularity of cryptocurrencies on exchanges is driven by demand. High global demand for Bitcoin, Ethereum, and Litecoin explains why the coins are popular on most exchanges.
After establishing popular coins, you’ll need to establish their trading volume and check their connection with other assets. Avoid trading pairs with little trading volume as there would be an insignificant market movement hence little or no profits.
What is the Best Cryptocurrency Trading Pairs in 2020?
USDT being quite popular and with the highest trading volume in the crypto sector means that it’s an ideal coin to consider. Therefore, it makes the best base pair when paired with other coins. Leading crypto trading pairs in 2020 include: USDT/BTC, USDT/XRP, USDT/ETH, and USDT/EOS. EOS has also risen in value and popularity thanks to an improvement in its security and transaction speed. Therefore, coin pairs such as EOS/USDT, EOS/BTC, and EOS/LTC are ideal trading pairs in 2020.
The cryptocurrencies market became more popular around the globe and attracted numerous investors looking to make a fortune. Additionally, cryptocurrencies have become more stable and accessible for trading. Cryptocurrency trading pairs are a simple way of comparing the cost of particular crypto with another. Being a neutral market strategy, crypto pair trading comes with several benefits as well as risks. Choosing an ideal cryptocurrency trading pair goes for pairs with a high trading volume, popularity, liquidity, and demand.