In cryptocurrency, the term “trading pairs” describes a trade between one type of cryptocurrency and another. For example, the “trading pair” ETH/BTC.
With ETH/BTC you can buy Ethereum with Bitcoin, or Sell Ethereum for Bitcoin. After-all, these cryptocurrencies are types of monies!
In other words, not only can you trade cash for cryptocurrency, you can also trade cryptocurrency for cryptocurrency. This can be a little complicated to wrap your head around, but can be a really big benefit to those who time their trades right.
Example: Consider, you have on hand Bitcoin and Cash (meaning fiat currency like dollar bills) and you want to obtain Litecoin. Now consider with the trading pair LTC/BTC, if Bitcoin goes up 10% and Litecoin goes down 10%, then your Bitcoin buys more 10% more Litecoin than your cash does. Your cash’s value stayed the same, but your buying power with Bitcoin went up 10%. Litecoin meanwhile went down 10%. The fiat value of the trade is no different in the moment the trade is made (as you owned that Bitcoin which went up in value the same as you owned your cash), but if your goal is to get more coins because you believe the cash value of all coins will go up (or that Litecoin will go up and Bitcoin back down in this example), and you time things right, you can do really well with trading pairs.
Of course, things can go very wrong with trading pairs too. In the above example, imagine Litecoin stagnates and Bitcoin goes up another 10%. In this case you would have missed out on 10% Bitcoin gains by spending Bitcoin rather than cash. Meanwhile, had you converted cash to Litecoin and kept your Bitcoin, or not traded at all, you would have more value total in your portfolio.
Now imagine Litecoin’s value keeps going down against BTC. You could end up with more fiat value than you started with, but a decreasing amount of fiat value over time compared to if you had just kept Bitcoin.
Hopefully that simple example gave insight into the value and risks of trading pairs. They are a powerful tool, but there is lots of room to go wrong.
The last thing to note here, and this is important, is that trading one crypto for another is a taxable event. If you don’t understand the tax implications behind crypto (in general: you owe the capital gains tax on profits whenever you trade from crypto to cash or crypto to crypto)…. then take a minute to learn about cryptocurrency and taxes.