What are “Trading Pairs” in Cryptocurrency?
In cryptocurrency, the term “trading pairs” describes the asset pair being traded (typically one cryptocurrency for 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!
Of course, fiat-based trading pairs can be found on cryptocurrency exchanges as well. For example, BTC/USD.
A fiat-based pair works the same as a cryptocurrency-based pair, except one of the assets being exchanged is a fiat currency (AKA dollars or cash).
In other words, not only can you trade cash for cryptocurrency, you can also trade cryptocurrency for cryptocurrency on cryptocurrency exchanges. 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!
Crypto trading pairs can be a little complicated to wrap your head around due to the fact they are valued in terms of their “base pair” (with ETH/BTC BTC is the base pair, with BTC/USD USD is the base pair), but they can also 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 US dollars) 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 at the moment the trade is made (as you owned Bitcoin which went up in value the same as you owned cash), but you can now buy more Litecoin with your Bitcoin than you could before. You may in this case for example choose to buy Litecoin with Bitcoin hoping that Litecoin catches up and gives you a chance to buy even more Bitcoin with your Litecoin.
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 an additional 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 this case, staying in cash or Bitcoin would have been a better play.
Hopefully, that simple example gave insight into the value and risks of crypto 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.