Cryptocurrency trading pairs function like a barter system of tokens. They are digital assets that are traded for each other over an exchange. Trading pairs are helpful because some cryptocurrencies can only be purchased through other cryptocurrencies. Moreover, knowing about crypto trading pairs will help you broaden your horizon beyond the mainstream cryptos you keep hearing about.
Additionally, since crypto markets are highly volatile, arbitrage opportunities open up when trading between tokens. Arbitrage trading refers to the quick purchase and sale of tokens in different markets to exploit differences in their prices. Also, with a trading pair, you no longer have to sell one cryptocurrency for fiat currency and then use that money to buy the other cryptocurrency. But why is this a problem?
Every transaction incurs a gas fee. These transactions are not only inconvenient but expensive too. Say you have 0.005 Bitcoin (BTC) and wish to purchase some Ether (ETH). At the time of writing, you would spend an average of $1.858 per transaction on the Bitcoin blockchain. Fortunately, the gas fees on purchasing ETH are negligible ($0.00008). But that’s not necessarily a constant value. Had you been making an ETH transaction on 1st May 2022, you would have paid $0.001 per transaction, which is 1150% higher! Such is the magnitude of gas fee fluctuations.
Crypto trading pairs also come in handy when purchasing a lesser-known cryptocurrency. Most exchanges will generally only allow you to buy such coins in exchange for a cryptocurrency it is paired with. The most commonly paired cryptos include Bitcoin and Ether. Some exchanges also offer stablecoin trading pairs. This is useful as most stablecoins are pegged to the USD, making it easier to estimate the value of a coin.
During the earlier days of crypto, when very few blockchains existed, crypto trading pairs were not a lucrative option. But, since then, thousands of cryptocurrencies have come into existence, and the number of trading pairs that exist today is more than what you and I can fathom.
A crypto trading pair is arrived at by correlating two cryptocurrencies and then arriving at their relative worth with respect to each other. By doing this, the value of one cryptocurrency can be measured in terms of a different cryptocurrency. For example, BTC/ETH is one of the most popular trading pairs. At the time of writing, the value of 1 BTC was equivalent to that of 15.09 ETH. This inter-token exchange is facilitated by decentralised exchanges (DEXs), which make it possible to trade in crypto without an intermediary.
But wait, doesn’t a DEX also use a blockchain since it is a decentralised platform? So, wouldn’t that also incur gas fees? Yes, you’re right. It would.
However, you would only be making one transaction instead of the two needed otherwise. Moreover, most DEXs are powered by the Ethereum blockchain and thus demand nominal gas fees. If you wish to prioritise your transaction, you can shell out higher gas fees and incentivise the miners to process it.
To summarise, trading pairs allow investors to reap the benefits of lower gas fees. It also enables seasoned investors to profit from differences in asset prices between exchanges. As such, they have become an integral part of the crypto sphere and have already proven to be a better option for crypto trading.
First Published: IST