Finding unique and convenient ways to exchange different digital assets, while dealing with transaction fee has been quite a struggle for many around the world, however that has changed with the introduction of crypto and stablecoin trading pairs in the digital asset space.
What are Crypto Trading Pairs?
Crypto trading pairs exist to provide users of cryptocurrency exchanges to directly swap out cryptocurrencies without having the need to trade their cryptos for fiat currency. Different cryptocurrency exchanges offer different types of trading pairs to facilitate their users in easier trades. Because of their high usage, crypto trading pairs have become a necessity for popular cryptocurrency exchanges like Coinbase, Binance and KuCoin to maintain onto their platforms.
Crypto trading pairs can be related to a barter system involving tokens. They can come in handy, if the user desires to get their hands on a cryptocurrency that is only accessible by purchasing it using another cryptocurrency and not traditional fiat. Getting to know about cryptocurrency trading pairs can also provide investors more clarity towards exploring new types of cryptocurrencies instead of the rather popular ones.
If investors study and learn about crypto trading pairs, it can also provide them a chance to take advantage of arbitrage trading strategies. This will be discussed in detail later. Examples of crypto trading pairs include bitcoin/Litecoin (BTC/LTC), ether/bitcoin cash (ETH/BTC) and several others.
Now that a basic understanding has been developed, we will now dive deeper into the details of cryptocurrency trading pairs and how they can be useful for investors seeking out to earn.
Working of Crypto Trading Pairs.
Cryptocurrency trading pairs provide the chance to differentiate costs among different types of cryptocurrencies. They provide an overview and estimate the relative worth of certain cryptocurrency assets, meaning that investors can know about the exchange rates between cryptocurrencies.
Just like Bitcoin to dollar conversion, trading pairs highlight direct exchange rates between other cryptocurrencies rather than comparing them to fiat currency first, like Bitcoin to Ethereum exchange rate. As mentioned before, trading pairs are mostly available on cryptocurrency exchange platforms, some of which offer quite an impressive number of trading pairs, with combinations of several types of cryptocurrencies, both popular and growing.
For a much clearer understanding, we can take the example of a person who wishes to visit France from the United States of America. The person would first have to gain knowledge about the direct currency exchange rate between the countries in order to develop a proper budget for the trip, avoiding any unforeseen expenses. At the time of writing, one U.S. dollar is exactly equal to one French euro. So, of the traveler would know this, it would make easier to purchase things in France.
In extension to the example mentioned above, if the person wants to visit the United Kingdom after his visit to France, instead of converting his euros back into USD for conversion into British pounds, the traveler can use the EUR/GBP trading pair to directly convert his Euros into British pounds, saving his money, which would have otherwise been utilized in extra unnecessary transaction fee, making the process of the research and expenses much simpler.
As of now, the most popular cryptocurrency trading pair available on cryptocurrency exchanges is the Bitcoin/Ethereum pair, which has the most value. With this in mind, we now move towards why cryptocurrency trading pairs are essential in the crypto space.
Why Crypto Trading Pairs?
Firstly, the basic idea behind crypto exchange pairs is to provide a direct exchange of cryptocurrencies without having the need to convert them into the respective traditional fiat currency first. Although converting to fiat currency might not be such a big issue, but for some sensitive traders, it can severely impact their trading record and potential.
More conversion means that there are more transactions to be performed, and the higher the number of transactions, the more trading fee is generated. Without trading pairs, these transaction fee continue to add up and technically lead to investor losing money. All that transaction fee instead could have been used for other investments and trading activities benefiting the user.
To understand this better, we can look at an example. Suppose an investor has about 0.005 Bitcoin holdings and now wants to obtain Ethereum cryptocurrency. As of this day, the investor would have to deal with an estimate of $1.85 on each transaction on the Bitcoin blockchain.
However, in the case of buying Ethereum, the gas fee is incredibly low to about $0.00008, but this valuation is not fixed. If the Ethereum transaction was done on the 1st of May in 2022, the fee would have been $0.001 for each transaction made, leading to around 1150% increase. This huge fluctuation percentage is a big problem.
With cryptocurrency trading pairs, it is easier to get your hands on unpopular cryptocurrencies, with majority of the cryptocurrency exchanges providing you a chance to obtain them via only another cryptocurrency paired with it. Some cryptocurrency exchanges also provide their user base with stablecoin trading pairs. Because majority of the stablecoins are connected to U.S. dollar, it becomes way easier to estimate the price difference between a coin.
Looking back in time, when the crypto space was developing in its initial stages and only a few blockchains were present, using trading pairs was not a viable option at that time. But now with the development of thousands of cryptocurrencies and blockchains, the number of trading pairs have also increased to unimaginable levels, making them quite an attractive option for many, looking for direct cryptocurrency conversion without having to worry about traditional fiat currency.
Considering another example, we can look at the BTC/ETH pair which is currently the top grossing cryptocurrency trading pair in multiple crypto exchanges. During the writing of this article, one Bitcoin was equal to around 15 Ethereum. This direct exchange is offered by decentralized exchanges (DEXs), that provide a path to direct crypto trade without an interference from fiat.
You must be wondering that because decentralized exchanges are involved, there has to some sort of gas fee involved as well. Yes, that is correct, but the thing to understood again is that the number of transactions would reduce, meaning that to convert Bitcoin into Ethereum, you would be performing only a single transaction instead of two transactions, eliminating that extra trading fee.
Decentralized exchanges also provide other features since they are based on Ethereum, so transaction fee is low as well. In the case of you wanting to get your transaction done as quickly as possible, you can shell out some extra gas fee to signal miners to process your transaction on a high priority.
Interpreting Crypto Trading Pairs
Interpreting a crypto trading pair is often seen as quite a trivial task, however there a few aspects that need to be learned to effectively interpret crypto trading pairs. Judging by the notations mentioned above, crypto trading pairs are highlighted by two combinations of three letters each, separated by a single backslash. For example, the Bitcoin to Ethereum trading pair would be highlighted as BTC/ETH.
Two aspects needed to be learned that include the base currency and the quote currency. The base currency is always mentioned first in the crypto trading pair. It basically refers to the cryptocurrency that is currently being held and needs to be exchanged. The example of BTC/ETH tells us that BTC is the base currency in the trading pair.
Taking the traveler example mentioned previously, if the person from the United States is traveling to England, the United States dollar will be the base currency. In crypto exchanges, to obtain another crypto that is only available through crypto trading pairs, the user is required to own an amount of the base currency before it can be exchanged. Traders must make sure to confirm which base currency and their respective pairs are accepting in the considered cryptocurrency exchange.
As for the quote currency, which comes after defining the base currency, after the backlash. In the example of BTC/ETH trading pair, ETH will be the quoted currency. Like the base currency, traders should also have a clear mind about what quote currency they want to seek before making any big moves. Both aspects of the crypto trading pair work in conjunction to define the exchange route and rates between them.
Using Trading Pairs in Arbitrage Trading Strategies
Because of the significant amount of volatility in the cryptocurrency market, arbitrage trading strategies arise between the token trades. Arbitrage trading is mostly known as rapidly buying and selling tokens inside of various markets to take advantage of the changes in price valuations. And because trading pairs cancel out of the involvement of fiat currencies, the need for converting tokens into fiat and then converting that fiat back into another token is no longer required.
Developing an arbitrager trading strategy around cryptocurrency trading pairs can sometimes become quite challenging and sophisticated. Some types of cryptocurrencies pairs have a different level of communication across different exchanges and since arbitrage trading strategies are only viable when this communication level is low, it can become difficult to determine which crypto exchange has what level of communication between cryptocurrencies.
This connection or communication can be referred with the term, correlation. Despite Bitcoin still maintaining its top position in the most traded asset and used cryptocurrency in the market, correlation level becomes low with the usage of trading pairs with limited trading volumes or being used on unpopular cryptocurrency exchange. This develops liquidity in the market, which leads to the development of arbitrage trading strategies.
However, the thing to be noted is that, since arbitrage trading strategies are quite challenging and complex, only experienced traders in the market should utilize them, as they require a lot of time and patience and if any inexperienced trader makes a rookie mistake, there is no telling what horrors await.
Crypto Trading Pair association with Stablecoins
Several exchanges around the world offer stablecoin trading pairs for their users having interest in stablecoins. Popular cryptocurrency exchanges like Binance and KuCoin have a large variety of stablecoin trading pairs offered on their platforms. According to souces, the most utilized stablecoin trading pairs involve U.S. dollar powered stablecoins that include tether (USDT), USD Coin (USDC) and Binance’s own Binance USD (BUSD).
Because of their immense popularity, these trading pairs have managed to secure impressive valuations of market capitalization. The stablecoins can also be paired with standard cryptocurrencies like Bitcoin and Ethereum. Example of these stablecoin pairs include, BTC/USDT, ETH/BUS, ADA/USDC and many more like this.
As previously mentioned, the utilization of stablecoin trading pairs can provide traders an easier way to determine their exchange rates, because of their connections with the United States dollar providing a relation in conjunction with traditionally defined fiat currency.
Trusting Decentralized Exchanges with Assets
Storing cryptocurrency assets inside of cryptocurrency exchanges is mostly seen as an easier option for many traders that are new to the crypto space since any assets, they initially invest on are easily added to their wallet that is present on the cryptocurrency exchange. However, the thing to note is that there is no guarantee that these platforms are resistant to abrupt changes or the case of a hacking attack.
In the past couple of years of time, hacking and exploiting attacks have risen to a record level, with hackers managing to steal millions of dollars’ worth of assets from different cryptocurrency exchange wallets, taking advantage of vulnerabilities in their core system securities.
In addition to that there are a few more thing to keep in mind when looking into centralized cryptocurrency exchanges.
Firstly, you have no control over your wallet’s private key. A digital wallet has two different keys, a public and a private key. The public key basically refers to your wallet address in case you need to be paid and is public. A private key is basically a lock code of your wallet and is only accessible by the wallet owner and needs to be confidential.
In the case of centralized cryptocurrency exchange powered wallets, your personally private key information is stored by the cryptocurrency exchange. This might be helpful in the case of private key recovery, but in general, it is strongly advised to use private wallet services and keep your private key confidential.
Secondly, exchange-based wallets can become frozen or inaccessible without any warning or notice, mostly in the case of maintenance or a hacking activity taken place or if the crypto exchange was to experience an unfortunate bankruptcy, leaving your previous locked either for a temporary period or forever.
And lastly there is the fee issue. Every transaction made through an exchange wallet generates fee. Although the fee valuations might be quite minimal and insignificant, but if you a big trader and perform any transaction in a short amount of time, then those transaction fee can collect with time, meaning that you have wasted a lot of your expenses in paying transaction fee.
Most of the traders operating in the cryptocurrency space use non-custodial wallets, meaning that the wallet is powered by private services and only you have control and responsibility on your private key. Not only that you also have full control over your wallet.
Online non-custodial wallets can be quite convenient, as they can be accessed from anywhere around the world, if there is an internet connection, however if you want to have the best security and ownership with your precious assets, offline, hard non-custodial wallets are your best bet.
Since a decentralized exchange is a peer-peer marketplace that provides communication between buyers and sellers, they are non-custodial and because these exchanges are not centralized, they utilize the power of smart contracts that operate autonomously and automatically save details about transactions into the main blockchain. Due to this, the level of trust increases, leading to advancements in the digital asset market, helping to produce more unique solutions for users.
There are several decentralized exchanges currently operating around the world, awaiting to be chosen by users looking to secure and trade their assets in a much more secure and efficient way. Exchanges like Uniswap, Kyber and Bancor have seen a major increase in user base levels and are contributing a very major role in the development of the crypto sector.
Conclusion
In conclusion, crypto trading pairs provide a convenient and cheap way to define exchange rates between different digital assets without having the need worry about converting them into traditional fiat currency. The removal of the involvement of fiat currency not only makes the exchange process simpler, but also helps to remove unnecessary transaction fee cuts, which would otherwise be used in other beneficial opportunities.
Trading pairs are both possible between standard cryptocurrencies and stablecoins, so users have a lot of flexibility in deciding what cryptocurrency they wish to seek to exchange to. Stablecoin trading pairs are usually easier to deal with since their value is pegged to the United States dollar, some of the considerations during value calculation are already defined, saving research time. In the end, it is the up to the trader to decide the best choice of action when performing trading activities.
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