Cryptocurrency trading involves buying and selling digital assets like bitcoin, ether and other cryptocurrencies on exchanges. Trading pairs represent two different cryptocurrencies that can be exchanged for one another on a trading platform.
One of the most common types of trading pairs is fiat-to-crypto, where a traditional currency, like the U.S. dollar, is exchanged for a cryptocurrency, such as Bitcoin. These pairs are typically represented with the currencies separated by a slash, for example, BTC/USD or ETH/USD. Additionally, it's possible to trade between two cryptocurrencies, such as in the ETH/BTC pair.
In a trading pair, the first currency listed is the base currency, and the second is the quote currency. For example, in the BTC/USD pair, Bitcoin is priced in U.S. dollars, meaning the price shows how many dollars are required to buy one Bitcoin. The same principle applies to crypto-to-crypto pairs, where the value indicates how much of one cryptocurrency is needed to exchange for another.
Analyzing trading pairs can reveal the change in relative value between two cryptocurrencies, independent of their movements against fiat currencies like the U.S. dollar.
For instance, while Bitcoin and Ether prices often move in tandem when quoted in dollars, their relative value can fluctuate. In mid-June 2017, Ether was priced at $343 and Bitcoin at $2,450, making the price of Ether in Bitcoin terms 0.14 BTC (calculated as $343/$2,450). By mid-June 2024, Ether was trading at $3,493 and Bitcoin at $66,139, but Ether’s price in Bitcoin terms had dropped to 0.053 BTC ($3,493/$66,139). This indicates that, although both cryptocurrencies surged significantly against the dollar over seven years, Bitcoin's value increased much more relative to Ether’s.
People trade them for several important reasons:
1. Diversification: Trading pairs enable investors to diversify their portfolios by exchanging one cryptocurrency for another.
2. Liquidity: They often provide high liquidity, allowing traders to easily enter or exit positions without significantly affecting the market price.
3. Market Access: Some smaller or less liquid cryptocurrencies may not be tradable directly against fiat currencies. Using trading pairs with widely accepted cryptocurrencies like Bitcoin or Ether gives access to a wider range of digital assets.
4. Risk Management: Investors can use trading pairs to hedge against price fluctuations in their primary holdings. For example, they can trade a volatile cryptocurrency against a more stable one to manage their exposure.
When considering shares, indices, forex (foreign exchange) and commodities for trading and price predictions, remember that trading CFDs involves a significant degree of risk and could result in capital loss.
Past performance is not indicative of any future results. This information is provided for informative purposes only and should not be construed to be investment advice. Trading cryptocurrency CFDs and spread bets is restricted for all UK retail clients.
Risk Warning: this article represents only the author’s views and is for reference only. It does not constitute investment advice or financial guidance, nor does it represent the stance of the Markets.com platform.When considering shares, indices, forex (foreign exchange) and commodities for trading and price predictions, remember that trading CFDs involves a significant degree of risk and could result in capital loss.Past performance is not indicative of any future results. This information is provided for informative purposes only and should not be construed to be investment advice. Trading cryptocurrency CFDs and spread bets is restricted for all UK retail clients.
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