How to Trade Crypto Pairs [2023]

How to trade crypto pairs

If you trade cryptocurrencies, you are probably already familiar with crypto pairs. The most famous one being ETH/BTC. Chances are you probably do not know exactly how they work or how to trade them right. Most people just look at crypto-FIAT pairs, like BTC/USD or ETH/USD for example. However, checking and understanding other crypto pairs is very important as a trader. This article will take a deeper look into crypto pairs. Let’s start by checking the types of crypto pairs.

Types of crypto pairs

FIAT currency/Cryptocurrency: These are the most famous cryptocurrency pairs, they show the price of a cryptocurrency against a FIAT currency (US dollar, Euro, Japanese Yen etc.) Examples are: BTC/EUR, BTC/USD, ETH/USD, ETH/EUR etc. Most people in the crypto space check these pairs and base their opinion on it.

Cryptocurrency/Cryptocurrency: These pairs show how an alt coin price performs against another alt coin, or bitcoin. An example would be: ETH/BTC —> how much 1 ETH equals BTC (example: 1 ETH = 0.078745 BTC). These are the types of cryptocurrency pairs you will see on exchanges:

—> BTC/Cryptocurrency: How much is x cryptocurrency in bitcoin?

—> ETH/Cryptocurrency: How much is x cryptocurrency in ethereum?

—> Cryptocurrency/Stablecoin: How much is x cryptocurrency in a stable coin? Price is mostly heavily correlated to FIAT pairs of course.

Some cryptocurrencies can only be bought with other cryptocurrencies (mostly BTC & ETH)! The most famous trading pair is ETH/BTC, which are the two biggest cryptocurrencies in the crypto space.

When checking a cryptocurrency, you will see that the BTC & FIAT prices mostly move in the same direction, but sometimes they are not correlated. You can check this at www.coinmarketcap.com, where you can select that the price gets displayed in both USD & BTC. Here is an example with Dogecoin (DOGE):

ETH/BTC

The most famous Cryptocurrency/Cryptocurrency trading pair that most traders look at is ETH/BTC. It shows how much 1 ETH is in BTC.

—> using ETH/BTC to anticipate major market moves

If the ETH/BTC chart looks bullish, it is likely that BTC is about to fall in price. At the same time, ETH and other alt coins should outperform BTC in price. Viceversa: If ETH/BTC is showing bearish price action, BTC will likely rise in price.

It makes sense to compare both charts, as sometimes you are more likely to estimate the next move by checking the crypto/crypto pair.

How to trade crypto pairs: Example with ETH/BTC

Pair trading is nothing new and comes from the traditional markets. It originated in the 80s from Wall Street, since many traders started using pairs as a hedging method. As a cryptocurrency trader, it is important to understand how to trade these crypto pairs. Let’s assume you are bearish on bitcoin and bullish on ethereum: You short btc, while simultaneously longing the ETH/BTC pair and/or the ETH/USD pair. The best crypto pairs to trade are almost the most liquid ones (also those with a large market cap). Please keep this in mind when pair trading:

Choosing a strategy: Successful traders know that a lot of trading is about the trading strategy. This also applies here: You need a good strategy for pair trading. As it was already explained, it is mostly used for hedging (strategies). Therefore traders can find opportunities (& profitability) in all market conditions. BUT, make sure to know your strategies and when to implement them. For example: When bitcoin pumps, ALT/BTC suffer a drawdown, while ALT/USDT pairs normally rise in price (Most altcoins don’t have USDT pairs btw). So when bitcoin is pumping, you as a trader need suited strategies that work in this scenario.

Risks involved: As easy as pair trading might sound, there are also risks involved. Strategies can quickly cost the trader money, when quick changes in the market are ignored or the wrong pair has been chosen. To conquer the biggest risks, you should only trade pairs with a high liquidity and also high volume.

Trading crypto pairs can be very hard to balance. You can be +5% in profit on ALT/BTC, while bitcoin is down -10%. You’ve gained some btc, while also having lost a lot of USD value in bitcoin at the same time.

Why should a crypto investor consider looking at crypto pairs?

Arbitrage opportunities: Being able to trade crypto pairs can help you use arbitrage opportunities for more profits. To be profitable with arbitrage trading, you typically need a lot of experience in the markets. So if you are just starting out, trading this way is not recommended.

Identifying new market moves: As it was explained in the ETH/BTC example. Traders who can analyze different pairs have much more insight into the markets as people who simply only check the FIAT price chart.

Profits regardless of the overall direction of the crypto market: As it was already explained, being able to pair trade can make a trader profitable in any market condition thanks to hedging. This doesn’t mean that the trader can not lose money anymore of course. A big factor of this is how good the implied strategy is and if it fits the current market conditions.

Get a better understanding of the markets: Being able to pair trade not only helps with maximizing a traders profits, it also helps boost the knowledge about how the markets move. You get a better understanding this way, which results in making better decisions.

Conclusion

Being able to pair trade is something for the more experienced traders. Every trader should look into it, but also keep in mind that nothing is risk-free. Pair trading will help boost your performance in all market conditions, therefore making you consistently profitable. Make sure to collect a lot of data and backtest your strategy, before starting with pair trading.

Even if you are experienced and already successful, that does not mean pair trading would be useful for you. This way of trading is often used by hedge funds and proprietary traders, and is not as profitable as it was years before. Even big players can make losses from it, so make sure it fits your trading style.