What is a trading pair?
Humans have always exchanged goods and items with each other to meet their own needs and wants. In fact, before we paid for things in currencies, we exchanged goods for each other.
When we exchange items, goods or money, we exchange what we have for what we want. These two types of assets are known as a trading pair.
The format of a trading pair is always unit of what you have / respective units of what you want. How much of what you want you can get for 1 unit of what you have is determined by supply and demand on the market. This results in the so-called exchange rate. For example, an exchange rate of apple / carrots = 1,5 means that 1 apple gets you 1,5 carrots. Simple enough? Let’s apply this format and vocabulary to currency trading.
Currency trading pairs
When trading currencies, the exchange rate is defined by the trading pair format is base currency/quote currency. The base currency is the currency you want to give/sell, the quote currency is the one you want to buy/receive. The exchange rate states how many units of quote currency you can get for 1 unit of base currency.
For example, an exchange rate of EUR/USD = 1,20 means that 1 EUR gets you 1,20 USD (excluding any possible exchange fees). At Blocktrade exchange, we offer both crypto-crypto and crypto-fiat-pairs. What is the difference between the two?
- Crypto-crypto-pairs are two cryptocurrencies exchanged for each other, e.g. the trading pair BTC/ETH describes how many ETH you get for 1 BTC.
- Crypto-fiat-pairs are a cryptocurrency exchanged for a fiat currency (or vice-versa), e.g. the trading pair BTC/USD describes how many USD you get for 1 BTC.
Trading crypto-crypto-pairs is generally what “crypto-trading“ is all about. Crypto-fiat pairs on the other hand are for example used to turn fiat deposits into cryptocurrency or exchange cryptocurrency to fiat before applying for withdrawing funds from your exchange account.
Why do trading pairs matter?
The concept of trading pairs is important because you can trade your desired cryptocurrency against numerous other currencies. The price of one cryptocurrency always changes in relation to another cryptocurrency. For example, the headline „Bitcoin price rose by 5 %“ is useless unless we know against which currency this is measured. Typically, of course, this is going to be in USD.
However, for investors that deposit and generally pay their bills in EUR, differences in the fiat trading pair EUR/USD can account for serious differences when determining the profitability of their trading activities.
How do I choose a trading pair? Which factors do I have to consider?
Being a rational trader, you will be trading to achieve a sizeable profit. Before you can choose “the right trading pair” however, there are a number of factors you should be taking into account.
- Horizon: Are you trading for the short term, e.g. a few hours or days, or do you want to hold the asset bought for a longer time frame of weeks, months or even longer?
- Expected performance: How do you expect the two currencies being exchanged for to perform for your focused time horizon? Most importantly, you will choose to buy a currency the price of which you are expecting to go up substantially.
- Volatility: Generally, cryptocurrencies are much more volatile than fiat currencies. This also means that crypto-pairs can have stronger fluctuations and are harder to track than crypto-fiat-pairs. This is one of the reasons why crypto prices are most commonly quoted in USD.
- Deposit currency: Obviously you must currently own the base currency in your exchange wallet, so you can exchange it for the quote currency. Before you can trade BTC/ETH, you must own BTC to sell it for ETH.
Generally, you will choose a trading pair if you expect the quote currency to go up in value, especially compared to the base currency you already own.
This is not financial advice. Mentioning listings and trading pairs is not a recommendation to buy, sell, or participate in the associated network. We would like to encourage you to do your own research and invest at your own risk.