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. And in fact some cryptocurrencies can only be bought with other cryptos, so learning about trading pairs becomes pretty important if you want to expand your crypto holdings beyond the major coins!
Trading pairs can be a little complicated to wrap your head around, but can be a really big benefit to those who time their trades right. To help you better understand trading pairs, consider the example below.
Example: Imagine 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’s value in dollars stays the same, then your Bitcoin buys 10% more Litecoin than your cash does. Your cash’s Litecoin buying power stayed the same, but your buying power with Bitcoin went up 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. By using trading pairs you can swap what cryptos you are in without ever leaving the crypto market and going to cash!
Of course, things can go very wrong with trading pairs too. In the above example, imagine after using Bitcoin to buy Litecoin, Litecoin goes up 1% and Bitcoin goes up another 11%. In this case you would have missed out on 10% Bitcoin gains by spending Bitcoin on Litecoin rather than cash on Litecoin!
Now imagine Litecoin’s value declines against both Bitcoin and the US Dollar, but Bitcoin rises against the US dollar. In a case staying in cash or Bitcoin would have been a better play.
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.