What are "Trading Pairs" in cryptocurrency?The cryptocurrency market is increasingly expanding, and becoming a trader is now a real profession, in many cases very lucrative.
4 June 2018 17:17 | NarrowWeb editorial staff
However, fully understanding all the mechanisms and technical complexities behind trading with cryptocurrency is necessary if you do not want to risk burning your capital on the wrong investments too quickly. To obtain a certain awareness of the basic mechanisms and the advanced ones is therefore one of the necessary steps before dying the first steps in the world of trading. In this article we will explain what Trading Pairs are and how to use them effectively in the world of cryptocurrency.
When talking about cryptocurrencies and trading it is essential to understand what "trading pairs" (i.e. currency pairs) are, since they represent one of the most effective methods through which you can get very secure gains.
Currency pairs describe an exchange between a specific type of cryptocurrency (e.g. Bitcoin) and another (e.g. Ethereum). Following this example, the pair in question would be BTC/ETH, and the trader can buy Bitcoin by spending Ethereum, or sell Ethereum in exchange for Bitcoin. In other words, in addition to exchanging cash using traditional currencies (dollar, euro), it is possible to exchange one cryptocurrency for another cryptocurrency.
In the BTC/ETH pair the first currency (Bitcoin) is called Base Currency, while the second crypt currency (Ethereum) is called Listed Currency. The exchange rate indicates the amount of quoted currency units are required to buy a base currency unit.
For example, if the current value of Bitcoin is 20 Ethereum, and you want to spend 1 Ethereum to buy the equivalent in Bitcoin, you will get a total of 0.05 BTC (in this case the exchange rate is 20). If the price of BTCs were to increase by 50% to 30 ETHs, the fraction of BTCs purchased by you would rise in value itself to 1.5 ETHs. And with an ETH value of around 600 USD, the net gain is a good 300 USD!
There are currently more than 1,200 cryptocurrency on the world market, the vast majority of which can only be purchased through Bitcoins. This cryptocurrency is in fact considered the base currency for all the others, and it is therefore essential to be able to move easily in the mechanisms of currency pairs. The very first step will then be to convert your base currency (dollars or euros) into Bitcoin, and then move progressively to the others using the aforementioned pair trading mechanisms.
Take for example the Monero (XMR). Assuming that this is the currency we have decided to invest in, we will not be able to buy it using simple USD (US dollars). We will have to use the currency pair XMR/BTC, i.e. we will have to buy a certain amount of Bitcoin first and then spend it on XMR. The price of the Monero is quoted at an exchange rate of 0.025, which means that it takes 0.025 BTC to buy a single XMR. In other words, if the USD value of the BTC is $14,800, an XMR will be worth $370.
If the value of the XMR were to rise to, say, $500, the trader would have a net gain of 35%, but only if the value of the BTH in the meantime has remained constant because the trade always takes place with the basic cryptocurrency, and not with dollars. The difficulty for the trader is therefore in the need to always have to follow two (or more) currencies at the same time, especially if you have to convert these same dollars into euros because you live in Italy.
Knowing the fundamentals through which you can earn with cryptocurrencies is the first step before diving into the complex world of trading. Even if at first understanding all these mechanisms may seem like a colossal undertaking, don't worry. Over time and with practice they will become automatic, which is why we initially recommend that you try your hand with a relatively small virtual portfolio. In any case, we wish you good luck!
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