If you ever come across any crypto trading platform or crypto exchange you must see some trading pairs such as ETH/BTC, BTC/USD, XTC/ETH. These things are called crypto trading pairs and to trade with cryptocurrencies, you need to understand how they work.
What are crypto trading pairs?
Cryptocurrency trading pairs show us how much of a coin or token is relatively worth. For example, if you had Bitcoin(BTC) and you see an ETH/BTC trading pair on cryptocurrency exchange you can see the Ethernum price for BTC, and see how many ETH you can buy with your BTC. Lets’s say have 2000$ and you want to buy Bitcoin. You need to find an exchange that lists BTC/USD trading pairs and see how much BTC your dollar is worth. In the above examples, the first time your base currency was BTC, and the second example your base currency was USD.
What is a base cryptocurrency?
Basic currency in trading pairs is used to determine the cost of the other pair. Put it simply the base currency is what you own, the other currency is what you want to buy. If you want to trade a specific crypto pair you should own the base currency. In most exchanges, this process is automatic. When you decide to trade on a specific pair, and with Crypto/Fiat pairs you see the FIAT price of the given crypto so you basically buy it and sell it right away.
What to look for when trading with crypto pairs?
Basic rules for trading on any exchange and with all securities be it stocks, forex, cryptocurrencies are the higher the volume in a given market the most likely the price is wont gonna do extreme changes. In the crypto market is also important that the exchange you use is safe. If it is used by many other investors your request equally meets the other part. Also try to use popular cryptocurrencies with a base currency like BTC, ETH, ADA. This avoids illiquidity which can cause aggressive price movements. Most of the exchanges are BTC-based but all of the popular ones list hundreds of crypto trading pairs and even hundreds of crypto/fiat trading pairs.
How can you profit from crypto trading pairs?
Just like with other markets there are several strategies you can use to trade with cryptocurrencies. These days several exchanges are offering trader-friendly UIs. They are equipped with charts, indicators a lot of trading pairs to chose from. There is profit to be made. But just like with other markets but it requires certain knowledge, a well-built strategy, and discipline to be successful.
You should choose a strategy that fits your personality. For example, if you don’t break under stress you may try day trading or if not day trading, then short-term investing. Another way would be just to put some of your savings into cryptocurrency. Research a few, and use the good old buy and hold method but always try not to invest only in one crypto because of diversification.
Despite which trading strategy you want to use never risk all your savings or money in the crypto market. It’s a wild space where prices can go hundreds of points up and down each day. Be careful and never put everything on one card. I am going to list you a few strategies people use today to make money on the crypto market, but that doesn’t mean these are the only ways or you can’t combine them.
The Buy and Hold method
This is probably the easiest strategy you can choose. If you ever listened to economic experts or some of the financial experts they say that this “passive” investing form outperforms the “active” investing over time. Well, one thing for sure that is a hell of a lot less work.
Let’s say you want to invest in cryptocurrencies. You know how much money you can lose if things on this market turn back. You don’t want to spend your time looking at charts and indicators all day so you decide you invest in cryptocurrencies in a “passive” way. So how can you make your investment as low-risk as possible while still profitable?
The best advice would be to stick with the popular cryptocurrencies and choose more than one and divide the amount you want to invest among them. Don’t forget that in 2016 a BTC was around 500$ and nowadays it’s worth around 40000$(2021. September 28) and some analysts say that it will go even higher. With this strategy you build your crypto portfolio over time you can make a reasonable profit.
Daytrading
Daytrading is a strategy that capitalizes on small price movements. It’s not uncommon for a day trader to do several short-term investments on a given day. Daytrading is often mystified by investors because there is a lot of fraud on the internet about it promising huge returns in a small amount of time making it sound like a “get-rich-quick” scheme.
Some of the managers and investors of founds even oppose this strategy. They think that the reward doesn’t cover the risk. On the other hand, there are successful daytraders around and people who made fortunes day trading so there is a profit to be made.
We let you decide what you want to think about this strategy but don’t let internet advertisements fool you. It is not easy. It requires a lot of odd knowledge about the market, market psychology, following the news, analyzing the charts and using this information, and make smart trades. I write more in the Does pattern day trading apply to crypto? about this strategy.
Technical analysis
I am sure when looked at cryptocurrency exchanges you see the charts of the prices if you open the given crypto trading pair. Technical analysis uses these charts to predict price movements. It is based on the premise that past price movements can be used to determine future prices. To achieve this a technical analyst uses a variety of tools from resistance lines to indicators.
A usual strategy uses at least four of them to see how the current trend changes. They should give signals when to buy the given crypto or when to sell it. You can use technical analysis as one of your tools in your investment decision-making or if you choose you can invest only by these indicators – it’s always a good idea to consider more factors though – for example in your day trading journey. I write about it n depth in the How to read crypto charts?
Using Arbitrage strategy
An arbitrage opportunity means that the investor can’t lose money. It usually occurs on the crypto market by pricing differences between different exchanges. An arbitrage strategy is carried out by simultaneously buying and selling the same crypto on two or three different exchanges. You make a profit on the tiny differences in price due to pricing errors. Usually, these opportunities exist only for a really short time. People using this strategy generally watching the prices with some sort of algorithm that makes the transactions if a given parameter is met.
Fictional simple example
Let’s say that Crypto EXchange1 offering XMR(Monero) for 230.73$ and Crypto EXchange2 list it for 230.63$. In this case, you can buy XMR from Crypto Exchange2 and sell it on Crypto Exchange1 leaving you with 0.10$ dollars on every XMR until Crypto Exchange2 doesn’t correct its price.
This is a very simplified example just to give you an idea on arbitrage It’s not the only type that can happen. There is triangular arbitrage for example where you change between two exchanges and 3 cryptocurrencies, but as I mentioned earlier to make this strategy work you need sophisticated software. Also as you can see from the above example you need to be well-founded to make money on these arbitrage opportunities.
Summary
Crypto trading pairs show a token or coin relative worth to another coin. The basis of comparison is called the base currency or easily put the currency you own and the other half’s price is expressed in this currency. Today’s market offers a large variety of crypto trading pairs including crypto/crypto and crypto/fiat. IF you want to trade with these pairs don’t forget to choose the popular cryptocurrencies to avoid extreme price movements.