Cryptocurrency trading involves buying and selling digital assets such as Bitcoin, Ether, and other cryptocurrencies on exchanges. A trading pair represents two different cryptocurrencies that can be exchanged for each other on a trading platform.
Some of the most common types of pairs are fiat-to-crypto. This is when a traditional currency, such as the US dollar, is traded against a cryptocurrency, such as Bitcoin. Pairs are often expressed with the currencies separated by a slash, such as BTC/USD or ETH/USD. You can also trade two digital currencies against each other, such as ETH/BTC.
The first currency listed is the base currency, and the second is the quote currency. For example, in the BTC/USD pair, Bitcoin is quoted in US dollars, and the price reflects the number of dollars required to purchase one Bitcoin. This concept extends to cryptocurrency-cryptocurrency pairs, where the value represents the amount required to exchange one cryptocurrency for another.
What can you tell me about the price of a cryptocurrency pair?
Looking at the pair, you can feel the change in the relative value between the two cryptocurrencies, regardless of the movement against a fiat currency like the US dollar.
For example, while Bitcoin and Ether prices are highly correlated when expressed in US dollars, their relative prices can fluctuate. In mid-June 2017, Ether could be purchased for $343, while Bitcoin was trading at $2,450. In Bitcoin terms, Ether was worth 0.14 BTC (think $343/$2,450). Seven years later, in mid-June 2024, Ether was worth $3,493, while Bitcoin was worth $66,139. However, in Bitcoin terms, Ether was worth 0.053 BTC ($3,493/$66,139), which is much lower than it was in 2017. This means that while both cryptocurrencies have skyrocketed against the dollar over the past seven years, Bitcoin has grown much more in value than Ether.
Why do people use cryptocurrency trading pairs?
There are a few main reasons why people trade them.
- diversification: Trading pairs allow investors to diversify their portfolio by exchanging one cryptocurrency for another.
- liquidity: These options generally offer high liquidity, making it easy for traders to enter and exit positions without significantly affecting the market price.
- Market Access: Some cryptocurrencies, especially those that are smaller and less liquid, may not be able to be traded directly with fiat currencies. Trading pairs with more widely accepted cryptocurrencies, such as Bitcoin or Ether, provide access to a wider range of digital assets.
- Risk Management: Investors can use trading pairs to hedge against price fluctuations in major assets. For example, if you hold a volatile cryptocurrency, you can trade it with a more stable asset to manage your exposure.
Cryptocurrency trading pairs provide the flexibility and strategy needed to optimize trading results and manage risk in the dynamic cryptocurrency markets.
Disclaimer: This article was created with the help of OpenAI’s ChatGPT 3.5/4 and has been reviewed and edited by our editorial team.
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