Trading cryptocurrencies is a little different than trading other assets such as commodities or stocks. While most trading operations are akin to one another, and even indicators can be reused, there is one metric i.e. trading pairs that differ crypto trading from stock trading.
Cryptocurrencies are usually traded against other cryptocurrencies, and if you are not well-versed in trading pairs, then this article will help you to garner in-depth knowledge of this key element of crypto trading.
What is a cryptocurrency trading pair?
The term “trading pairs” describes a trade between two different cryptocurrencies. In most cases, people use BTC to trade against another cryptocurrency on a digital asset/bitcoin trading platform, but there are many other pairs that you can leverage.
How do trading pairs work?
Trading pairs come in handy to establish the value of a cryptocurrency when it is traded against another cryptocurrency. It generally works by comparing the value of an asset for another. Let’s understand this phenomenon with a simple example:
Suppose, there is a guy named Eric who possesses one BTC and wants to purchase Ethereum. He signs up on a digital asset exchange platform and navigates towards the ETH/BTC trading pair. The exchange then displays the current value of Ethereum and if Eric agrees to its price, he places an order to sell half of his BTC for ETH.
ERIC was able to execute this trade because he already owned bitcoin, which was a base trading pair. If he had XRP instead of BTC but there is no trading pair on the exchange for XRP, then his trade would look different. So, make sure to choose the best crypto exchange that offers every kind of crypto trading pair to facilitate quick trading.
What is the difference between crypto trading pairs?
Though there are various trading pairs on an exchange which works the same way, you must be aware that the value for each pairing could be much different. This is because every pairing has its own bids and asks, and depending on demand, you could pay a premium with these pairs, or maybe get a good deal upon fulfilling a demand. Besides, if you trade using BTC, there are more chances to gain profits.
How to choose a crypto trading pair?
Always make sure to choose a trading pair by taking the current trading volume into consideration in order to reap benefits. If a pair has a low trading volume, then you could have to wait for a long time to find the perfect match. So, count on a trading pair which has a high trading volume to make a good deal in a couple of seconds.
Trading pairs base currency
The base currency is one that is deemed as a common trading pair on a cryptocoin exchange. In most cases, base currency typically comprises BTC and ETH as they are the most popular cryptocurrencies one could invest in. However, some exchanges also offer their own base currencies. This could include ZedXe’s ZFL, which is its own native token.
Different exchanges accept different base currencies. You can check the base currency pairs available on an exchange to find a perfect pair for you.
Correlation between cryptocurrency trading pairs
Some crypto trading pairs have a certain value correlation where they follow each other. Since Bitcoin has gained the most momentum in the crypto market, many pairs tend to follow this maiden currency, but sometimes there is a certain deviation. This can only be true if you are using an exchange or a pairing having low trader count. In this scenario, all the demands can be fulfilled within bitcoin base currency, which in turn, lowers the liquidity of other pairings.
Cryptocurrencies are rapidly gaining mass adoption as they offer enormous benefits to new and experienced traders. But it is paramount to invest in a cryptocurrency having high liquidity and choose the best trading pair to harness the potential of the cryptocoin market.
Like liquidity, trading volume is also an imperative metric for the success of an exchange. It is basically a measure of the amount of a cryptocurrency that has been traded in the last 24 hours. From volume, users can infer the movements and direction of a cryptocurrency. An asset with frequent heavy movements won’t gain traction even if it has a high trading volume. Conversely, if a crypto has less volume but experiences heavy trading in the last 24 hours, it signifies that there is some support behind the transactions of this currency.
Though trading volume is a crucial parameter in the crypto sphere, there are ample factors that can impact this parameter impeccably. Some of the key factors are:
Proper regulations are vital for a cryptocurrency to make a statement in the market. Different nations have different perceptions of digital assets. While some have taken necessary steps to regulate them, others have brought forth stricter regulations or forged ahead to ban their use. The decisions made by the governments regarding the regulation of the cryptocurrencies impact greatly on their trading. If regulations support the digital currencies, their prices tend to escalate and trading volume experiences an elevation. However, if strict regulations are introduced or their trading is banned, their prices drop, leading to a decline in the trading volume.
The value and trading volume of a cryptocurrency is determined by its usability. A digital currency that has the potential to solve real-world problems are deemed to have higher value and consequently, shines in the market. For example, Bitcoin, the founding father of the cryptocurrencies, is a solution of the double-spending problem, a barrier, technocrats had been striving to overcome since two decades by making digital money a reality. Bitcoin adopted a peer-to-peer decentralized timestamp server to create a computational proof of the sequential transactions to overcome this issue. There are many other reasons behind the more usability of Bitcoin, which in turn, has increased its market price as well as trading volume. Besides, as per the Joseph Oreste perspective, who is the founder and CEO of Qupon, regulations and usability are the major factors to foster the trading volume of the digital assets in a cryptocoin exchange.
The supply and demand of cryptocurrencies also immensely impact their trading volume on a digital asset exchange platform. If a cryptocurrency is in high supply but low demand, its value is more likely to dwindle. Similarly, if it is in high demand but low supply, its value will increase. This is especially applicable for Bitcoin whose trading volume is strongly linked with its demand and supply.
These are the key factors that can affect the trading volume of the cryptocurrency in the exchange. So, always make sure to list the assets in your online coin trading platform that are completely regulated or have already disrupted the crypto market.
Liquidity is described as the potential of cryptocurrencies to be converted into fiat currency or any other coin with no compromise on their value. It is deemed vital for a cryptocurrency exchange as it signifies a stable market where investors and traders can trade smoothly, quickly and conveniently. This is why most businesses reinforce their trading platform with robust features that can foster its liquidity and help them shine in the market as the best crypto exchange.
Advantages of high liquidity:
Better and fair crypto prices
A host of traders in the market can contribute to the equilibrium price of the cryptocurrencies. For instance, high trading activities in a robust and feature-rich exchange ensure that buyers could bid at high prices and sellers could sell their assets at competitive prices. This creates stability in the price of the digital assets, which is beneficial for both the buyers and the sellers.
High stability in the market
High liquidity leads to high stability and invulnerability to large fluctuations in the market due to large trades. For instance, investors having a great deal of money can notably influence or manipulate the prices in the illiquid market with a little activity. A single trade order placed by them can bring a lot a variation in the crypto prices, which may fuel volatility in the crypto market. On the contrary, a plethora of orders placed by a large number of traders in the liquid market can effectively maintain crypto price stability and mitigate the volatility.
Fast trading process
A liquid market facilitates and accelerates the execution process of crypto trading. With a large number of traders and investors, the trade orders are fulfilled post-haste. Also, the trades can easily be entered and exited which may be challenging in the fast-paced crypto market.
Accurate technical analysis
Technical analysis is basically defined as the historical market prices of digital assets and the use of this data to envisage the crypto prices with the help of technical indicators and chart patterns. Although many experts do not believe in the accuracy of technical analysis, it is a widely-adopted technique to understand the general market and trading. The liquid market has a relatively more advanced and precise formation of price and charting, which significantly enhances data accuracy.
How market makers help in improving liquidity
A market maker or liquidity provider plays a vital role in developing valuable digital currency trading platforms and setting up efficient market mechanisms. It can be a financial institution or an individual that quotes both a buy and a sell price in a financial instrument. Besides, market makers render liquidity enough to lessen price volatility and allow traders to trade their assets at affordable prices.
Market makers benefit traders and investors by ensuring:
Quick order processing
A market maker implements the best strategies to ensure that a buyer matches with a best seller and vice-versa. When a buyer places an order for a certain currency, the market maker casts around for a seller of the same currency to instantly match the order and minimize the delays.
Marker makers make certain that the spreads are stabilized in line with its role to provide and enhance market liquidity. They keep the crypto prices at a fixed and fair level to offer a well-organized entry point for traders.
Market makers enhance the trading volume as well as user count of a cryptocoin exchange. It can further boost the confidence of investors in dealing with the crypto market.
At one fell swoop, liquidity is essential for crypto trading. The higher the liquidity, the more beneficial it is for the exchange as well as the market participants.