The crypto market is one of the most overwhelming financial markets for newcomers – it presents them with concepts challenging to understand without extensive research and requires them to learn how to use trading strategies to achieve their goals.
More often than not, a crypto newcomer will start trading crypto pairs because they are the easiest-to-grasp concept in the sector. And even if it’s easier to make a profit from trading crypto pairs than employing other strategies, navigating the intricacies associated with them is usually a cornerstone for those lacking experience. Crypto assets shift in price dynamically, so when one wants to trade a pair like ETH/BTC, they need to learn the nuances of the relationship first.
Trading crypto pairs is more than buying and selling assets; it implies diving into the crypto sector and understanding its unique characteristics. Each crypto pair offers information about the comparative value between two digital assets and the equation between them.
What are trading pairs?
Crypto trading pairs lay at the base of exchanges as they represent the comparative value between the two assets. The offered example, ETH/BTC, represents the comparative value between Ethereum and Bitcoin and how Ethereum measures up against Bitcoin—understanding how crypto pairs function enables investors to assess the strength of particular cryptocurrencies and execute profitable trades.
In stock markets, assets are usually traded against fiat currencies, but in this situation, the pair includes assets of the same category. Crypto pair trading enables investors to navigate the exchange rates between two digital assets, which provides them with unique opportunities and challenges.
Trading crypto pairs allows users to swap one digital asset for another. The first asset in the pair is called the base currency and is the one they buy or sell. The second asset in the pair is the quote currency and reflects the price in the market in terms of the base currency. In the given example ETH/BTC, ETH is the base currency, and BTC is the quote currency. If the ETH/BTC pair is priced at 0.02, 1 ETH costs 0.02 BTC.
What kinds of crypto pairs can you trade?
Fiat pairs include government-issued money and cryptocurrencies, enabling users to convert between them. Some popular pairs are ETH/EUR and BTC/USD.
- Stablecoin pairs include stable assets and are often used by investors who want to manage the amount of risk they expose their portfolios to. Some popular examples are SOL/USDC and BTC/USDt.
- Crypto-to-crypto pairs include two digital currencies and allow the users to swap between cryptocurrencies without using fiat money.
Factors to consider when picking crypto trading pairs
The selection of a trading pair can significantly impact your trading strategy, profitability, and overall market experience.
Here are the key factors to consider when picking crypto trading pairs.
1. Liquidity and Trading Volume Matter More Than You Think
Liquidity and trading volume are crucial when selecting a trading pair. A pair with high liquidity ensures that you can enter and exit positions easily without significant price slippage.
- High liquidity: Major trading pairs like BTC/USDT and ETH/USDT tend to have high liquidity, which means tighter bid-ask spreads and more efficient order execution.
- Low liquidity risks: Less popular pairs may experience large price fluctuations, making them riskier for traders looking for stability.
Checking the 24-hour trading volume on exchanges like Binance can help assess how active a trading pair is. Higher trading volume often signals strong market interest and reduces the risk of price manipulation.
2. The Role of Market Volatility in Your Trading Strategy
Different trading pairs have varying levels of volatility. Volatility refers to the price fluctuations of an asset within a given time frame.
– Stable pairs: Pairs involving stablecoins, such as USDT/BUSD, tend to have lower volatility. These are ideal for traders who prefer a lower-risk environment.
– Highly volatile pairs: Pairs involving altcoins, such as DOGE/ETH or SHIB/BNB, can be more volatile, which presents opportunities for traders seeking quick price movements.
Understanding volatility is essential because it determines the potential risk and reward of a trading strategy. Day traders and scalpers may prefer volatile pairs, while long-term investors might opt for more stable trading pairs.
3. Correlation Between Trading Pairs Can Affect Portfolio Performance
Many cryptocurrencies move in correlation with Bitcoin or Ethereum. Understanding how correlated the assets are is essential when selecting a trading pair.
- Highly correlated pairs: BTC/ETH and ETH/SOL often move in the same direction, which may limit diversification benefits.
- Uncorrelated pairs: Some pairs, like BTC/USDT, offer better risk management by pairing a volatile asset with a stablecoin. If you are looking to hedge against market downturns, picking less correlated pairs can help balance your portfolio.
4. Trading Fees Can Eat Into Your Profits
Different trading pairs may have varying trading fees, which can impact your profitability. Exchanges like Binance charge fees based on trading volume, asset type, and whether you are a maker or taker.
- Stablecoin pairs: Pairs involving USDT or BUSD often have lower fees compared to fiat-based trading pairs.
- Altcoin pairs: Some altcoin pairs might have higher fees due to lower liquidity or market demand.
Checking the exchange’s fee structure before selecting a trading pair can help you minimize unnecessary costs.
5. Market Trends and News Can Influence Pair Selection
The popularity of certain trading pairs often depends on broader market trends and news. For example, during a Bitcoin bull run,
BTC pairs like BTC/ETH or BTC/SOL may see increased trading activity. When altcoins rally, altcoin trading pairs such as SOL/ETH or AVAX/BNB could experience higher volume. Keeping track of market news, regulatory updates, and macroeconomic events can help traders choose trading pairs with strong potential.
6. Exchange Support and Availability of the Trading Pair
Not all trading pairs are available on every exchange. Some exchanges support a wider range of pairs, while others may limit options based on liquidity and compliance regulations. Major exchanges like Binance offer a vast selection of trading pairs, including stablecoins, altcoins, and cross-crypto pairs. Smaller exchanges, on the other hand, may have limited trading pairs and lower liquidity, affecting trade execution.
Before committing to a specific pair, ensure that your preferred exchange supports it and offers sufficient market depth for smooth trading.
Picking the right crypto trading pair is a fundamental part of a successful trading strategy. Liquidity, volatility, correlation, trading fees, market trends, and exchange support all play a role in determining the best trading pairs for your needs.
