How to Choose Cryptocurrency Pairs to Trade?
Cryptocurrency trading is fundamentally about predicting what the market will do next. If you see 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 main tools to grasp market behavior and trends. But, one of the most important decisions for a trader is choosing a crypto pair to trade.
What is a trading pair?
A trading pair is two cryptocurrencies you’ll be trading in between. For example, EOS/USD means trading between EOS and the US dollar, just as LTC/USD is 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. You can find a full list of the most popular cryptocurrency pairs here.
Picking the wrong one to trade will cause 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 how quickly 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 much 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, make sure there is enough 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, it’s very likely you’ll 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.
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 of the crypto market (compared to altcoins) and the technological development 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 is a cryptocurrency built on a different technology than bitcoin or ether. Its price moves around differently from the major currencies. This opens opportunities to make profits that many traders only trading 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, so there is plenty of liquidity still.
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.
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 means purchasing an asset in one market at one price, then instantly selling it in another market at a higher price, earning an instant profit. This can be an extremely fast way to earn a profit if you can find the opportunities. Cryptocurrency arbitrage usually means buying a cryptocurrency on one exchange, then instantly selling it on another exchange where the price is higher. Arbitrage opportunities usually exist for a short period of time, so you need to be able to find them faster than others.
Any cryptocurrency pair can be used for arbitrage. Trying to focus on one trading pair for arbitrage may limit your opportunities. They may occur more frequently in smaller cryptocurrencies, as these markets are 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.
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 making consistent profits, even when other traders are struggling with other trading pairs.