Introduction to cryptocurrency trading pairs

Introduction to cryptocurrency trading pairs

Cryptocurrency may be the entry point into the world of trading for many enterprising newcomers. This is by no means a bad thing, but it does raise two obstacles. The first is that they have to get to grips with the world of cryptocurrency. The second is that they have to get to grips with the art of trading.

Because we believe that cryptocurrency is going to change the world, and when it comes to the exchanges, many of the most important concepts carry straight over from conventional stock or forex investment communities. ‘Trading pairs’ is just one example.

If you’re new to the crypto exchanges, you might be wondering what they are – and, moreover, why they matter.

Pair necessities

Pairs trading is what happens when you take a ‘long’ position in one stock – and a ‘short’ position in another. These stocks can be positively correlated and moving in broadly the same direction, which can mean investing in relatively similar companies: going long on Coke (KO) and going short on Pepsi (PEP); going short on Ford (F), go long on General Motors (GM), or vice versa. However, trading pairs can also be negatively or non-correlated - it really depends on the assets you are interested in.

Once you’ve established your trading pair of choice, you’ve got to monitor the markets closely. If one stock starts moving in a different direction from its counterpart, you buy the one that’s underperforming and short-sell the one that’s overperforming. Through the magic of trading, you then make a profit.

Trading pairs in cryptocurrency

When it comes to cryptocurrency, it all works in pretty much the same way – just with Bitcoin, Litecoin, Ethereum, Ripple, et. al, or a fiat currency. One long, one short, short the one that’s doing well, buy the one that’s doing poorly, rinse, lather, apply moisturising hand cream and repeat.

Okay, it’s not quite as simple as that. But we’ll cover trading strategies in more depth in later modules.

For now, the only real difference between traditional stock trading pairs and cryptocurrency trading pairs you should be aware of is that – cryptocurrency being a relatively new phenomenon – it can often be difficult to find your exact pair on a single exchange. Accordingly, most pairs will involve a major coin like Bitcoin or Ethereum.

Pairing is caring

So how do you know which coins to pair? On most exchanges, when you see two different currency symbols next to each other, it means you can buy and sell them against each other. The first trading pair you encounter in this manner will likely be your native fiat against Bitcoin, and it should display thusly: GBP/BTC; EUR/BTC; USD/BTC. Most exchanges will offer simple pairings of Bitcoin, Ether, or Litecoin with GBP, EUR or USD.

More complicated pairs and more advanced trading will require delving into the altcoin market, which typically doesn’t accept fiat currency – though it varies based on what a specific exchange has to offer.

Some exchanges, for example, might offer USD/XRP (the pairing of the US dollar and Ripple), but others may not. More commonly, major coins such as BTC and ETH are used as the gateway to a wider selection of trading pairs.

Pairing it down

So which currency combinations are the most lucrative?

Well, that’s a question for a later module: we’ll be covering specific strategies further down the line. But, generally speaking, it varies based on your objectives and on current market conditions.

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What is a trading pair?
Two closely related stocks or currencies
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