“Trading pairs” or “cryptocurrency pairs” are assets that can be traded for each other on an exchange. Much like in the world of forex trading, crypto pairs consist of two competing assets. The pair will have an exchange rate that moves up and down on a second-by-second basis, which makes it challenging to predict whether this will rise or fall.
To take full advantage of crypto trading pairs, you need to understand base currencies.
A base currency is a way to denote an agreed-upon value of different assets. Base currencies are a common tool for comparing exchange rates across fiat currencies in different countries. An American traveling to Italy will want to convert USD into the Italian currency, the Euro. In this case, the USD serves as the base currency. The same principles apply to crypto assets.
If you’re seeking a lesser-known crypto on an exchange, you’ll likely need to own one of the base currencies listed in a pair before you can trade. In most cases, the most popular cryptocurrencies (BTC, ETH) serve as base currencies, but accepted base currencies will vary for each exchange. Before diving into trading pairs, investors should confirm which base currencies are accepted at their exchange of choice as well as which trading pairs the exchange offers. In addition, many exchanges offer stable coin trading pairs, usually pegged to USD.
It is important to note that there are two main types of crypto pairs. This includes fiat-to-crypto pairs and crypto-cross pairs.
The most traded digital currency markets are fiat-to-crypto pairs. As the name implies, each pair will contain a fiat currency and a digital currency. For example, the previously mentioned BTC/USD is a fiat-to-crypto pair, as this contains the US dollar (fiat) and Bitcoin (digital). Other popular fiat-to-crypto pairs include ETH/USD, XRP/USD and BCH/USD.
As shown above, the vast majority of crypto-to-fiat pairs contain the US dollar. This is because the US dollar acts as the benchmark currency for the digital asset industry. This is no different from the global commodity trading scene – with the likes of oil, natural gas, gold, silver, wheat, corn, and soybeans all quoted against the US dollar.
The second pair type that you will likely come across when trading digital currencies is a crypto-cross pair. Unlike the previously discussed pair type, this will never include a fiat currency. On the contrary, crypto-cross pairs contain two different cryptocurrencies, such as BTC/XLM, ETH/BCH and BTC/ETH.
Crypto-cross pairs that contain major digital currencies – such as Bitcoin, Ethereum, Ripple and Tether, attract lots of liquidity at online exchanges. But, if you decide to trade a crypto-cross pair that contains a less-liquid digital coin, this will result in low trading volumes and wide spreads.
With that said, the biggest challenge when attempting to trade crypto-cross pairs is that there is no way to price the position in fiat currency.