There are thousands of cryptocurrencies in existence with varying popularity, prices, capitalization, and trading volumes. For example, the most valuable asset may be CELO with a value of $10,000, but there’s very little liquidity - this would be an unviable trade. Despite there being 2000+ crypto coins, only a small selection is used for trading, but how do you choose the right ones? Continue reading to find out more.
How Trading Pairs Work
Cryptocurrency trading pairs allow investors to draw comparisons between two currencies. For example, Bitcoin (Bitcoin) and Ethereum (ETH) can be put together to work out value both ways. If you hold currency in a high-quality exchange like OKX, you’ll be provided several pairing options tailored to your held assets. For example, if your assets are held in ETH, you may make any trade including ETH.
Choosing a Base Coin
Before making a trade, you need to grasp the concept of base currencies. The base currency is used to determine an agreeable value across various assets. Base currencies are used in the crypto and fiat trading worlds. For example, if you’re traveling from America to France and need to exchange USD for Euro, the USD will be the base currency.
Base currencies work exactly the same in the crypto world. If you’re trying to get your hands on obscure crypto, you’ll need to hold one of the base currencies in a given pair. Typically, the most popular assets on the market act as base currencies (BTC, ETH, etc.). However, you will need to examine each exchange because base currencies have a habit of fluctuating.
What Is Liquidity?
Liquidity is the driving consideration to make when choosing crypto pairs. Essentially, liquidity refers to the speed at which an asset can be sold. The greater the liquidity of a cryptocurrency, the more opportunities you’ll have to sell it. The profit you can make from a crypto pair is defined by liquidity, which is why it’s essential to understand.
Liquidity is intrinsically linked with the speed of a crypto sale, but it’s also entwined with risk reduction. When you have high liquidity and plenty of options, you’ll never have to settle for a lower trade price to secure buyer attraction.
What About Arbitrage?
Arbitrage crypto strategies are used by advanced investors to manipulate profit across multiple exchanges. Many crypto assets are evenly priced across exchanges, but you need a low correlation to create arbitrage wins. Bitcoin is the most traded crypto and is available on most exchanges. However, when you start trading BTC with limited trading volume coins or using scarcely used exchanges, you will find illiquidity in the market that can pay off.
Trading cryptocurrency can be highly rewarding, but it will always carry risks. Fortunately, you can mitigate risk by learning the fundamentals of trading. Now that you understand what crypto pairs are, you can explore various exchanges, begin creating a winning strategy, and set aside a small percentage of your available assets to begin trading with.