Cryptocurrency trading is fundamentally about predicting what the market will do next. If you see that the price of a crypto asset is likely to go up compared to another asset, you can buy it and earn a profit. If it’s going to drop, you can sell and avoid a loss. You don’t need to be right all the time, just slightly better than most traders to stay ahead of the market.
To do this successfully, you’ll need a deep understanding of the cryptocurrency markets. Fundamental and technical analysis will be your primary tools for understanding market behavior and trends. However, one of the most crucial decisions for a trader is selecting a suitable crypto pair to trade.
What is a trading pair?
A trading pair is two cryptocurrencies you’ll be trading between. For example, EOS/USD refers to trading between EOS and the US dollar, just as LTC/USD refers to trading between Litecoin and the US dollar. You can also trade between cryptocurrencies directly. BTC/ETH means trading between bitcoin and ether, and LTC/BTC means trading between litecoin and bitcoin.
Picking the wrong one to trade can result in financial losses. You need to pick a pair where you have an edge over the market, an area where you can become a specialist. Here are some factors to consider.
How liquidity affects the choice of a currency pair
Liquidity refers to the ease with which a cryptocurrency can be bought and sold on the market. In general, cryptocurrency pairs with high liquidity allow you to make faster trades at better prices. When using low-liquidity coins, you may have to wait longer for trades to execute, and there will likely be a larger spread.
Liquidity is largely driven by trading volume. The most popular trading pairs have the highest liquidity. If you want to do high-frequency trading daily or hourly, you’ll probably need to pick pairs with relatively high liquidity. However, if your trading strategy requires many fewer trades (e.g., picking cryptocurrencies to buy and hold for months or years), then liquidity may not matter so much to you. Before choosing which pairs to trade, ensure there is sufficient trading liquidity to suit your trading style.
Which currency should be used as the base?
When trading, it’s best to use a major currency as a “base” in your trading pair — for example, bitcoin, ether, or USDT (tether). These are the most popular currencies with the highest liquidity and are supported by all major crypto exchanges. If you have one of them in your trading pair, you’ll likely be able to make the deal. Trading pairs involving two much smaller cryptocurrencies are difficult to trade consistently and successfully.
What are the advantages of one pair over the other?
When choosing a cryptocurrency pair, the most important factor is picking one where you can stay ahead of the market. Here are some reasons you may want to consider different pairs.
BTC/ETH
Bitcoin and ether are the two most popular cryptocurrencies, and this pair has extremely high liquidity. This trading pair is driven by Bitcoin’s dominance in the cryptocurrency market (compared to altcoins) and the technological advancements of the Ethereum blockchain. You need to pay less attention to the progress of cryptocurrencies as a whole and have more knowledge of what’s happening within the cryptocurrency market. If you can understand these factors well, you can have an advantage in trading this pair.
EOS/USD
EOS is a cryptocurrency built on a different technology than Bitcoin or Ethereum. Its price moves around differently from the major currencies. This opens up opportunities to make profits that many traders who only trade Bitcoin and Ether will miss. Trading EOS in a pair with USD makes the most sense, as this pair has daily volume measured in over a billion dollars, ensuring plenty of liquidity remains.
LTC/BTC
Litecoin is another popular currency to trade against Bitcoin. Litecoin is a fork of the Bitcoin blockchain, meaning it is a spinoff of the Bitcoin network. Litecoin is designed to be a “lighter” version of Bitcoin, with faster and cheaper transactions. Litecoin is one of the most popular altcoins and a great alternative to Ether in trading. It will take less research and expertise to become a top trader in LTC/BTC.
LTC/USD
Trading Litecoin against the US dollar is a slightly different market to LTC/BTC. Here, you’ll need to be more familiar with how the cryptocurrency market as a whole is doing compared to traditional assets.
Which cryptocurrency pairs open up arbitrage opportunities?
Arbitrage refers to purchasing an asset in one market at one price and then instantly selling it in another market at a higher price, thereby earning an immediate profit. This can be an extremely fast way to earn a profit if you can find the opportunities. Cryptocurrency arbitrage typically involves buying a cryptocurrency on one exchange and then instantly selling it on another exchange where the price is higher. Arbitrage opportunities usually exist for a short period, so you need to be able to find them faster than others.
Any cryptocurrency pair can be used for arbitrage. Focusing on a single trading pair for arbitrage may limit your opportunities. They may occur more frequently in smaller cryptocurrencies, as these markets tend to be less efficient.
There are some risks with this method. Trading fees can easily eat away at your arbitrage profits, even if you can sell instantly at a higher price. There is also the risk that an arbitrage window will close before you get the chance to close your trade. For these reasons, arbitrage is best for advanced traders who can build systems to minimize these risks.
Conclusion
Choosing the right cryptocurrency pairs to trade is one of the most important decisions you’ll make as a trader. It will determine what areas of the cryptocurrency market you need to focus on and become an expert. Make sure to choose the right pair to dominate, and you could be generating consistent profits, even when other traders struggle with their trading pairs.
