Cryptocurrency pairs are a combination of two currencies used to compare prices and trade for each other on exchanges.
Crypto assets that support multiple trading pairs can result in lower fees and more stable prices. The most common pairs are BTC/USDT, ETH/USDT, and BTC/ETH.
Normally when pricing cryptocurrencies, investors express them in dollars or stablecoin equivalents like $USDT (Tether) or $USDC (USD Coin).
That’s because the clearest way to measure price changes is to compare assets with a currency that’s stable or non-correlated, whether it’s fiat currencies or other crypto assets.
For example, while centralized exchanges (CEXs) express prices in USDT or BTC, in the Ethereum blockchain, all assets are priced in ETH units by default.
What Are Cryptocurrency Pairs?
Before digging into the details, we have to answer the following question: What does pair mean in cryptocurrency?
Pairs are relations between two token prices.
Each pair that appears on crypto exchanges means that the company has enough of both (also called liquidity) to allow swapping tokens directly, avoiding extra trading fees.
This is more efficient because usually, traders need two orders to swap altcoins:
- Sell Altcoin1 for Bitcoins or dollars
- Buy Altcoin2 with Bitcoins or dollars
Instead, large exchanges may have an Altcoin1/Altcoin2 pair to exchange them in a single order.
There are different reasons why certain token pairs don’t appear:
- It’s a new cryptocurrency. As it becomes more popular, exchanges may add more pairs
- Some exchanges have more pairs than others due to their liquidity
- An exchange decides to remove the token (for example, due to low trading volume)
In practice, different pairs for the same token may have slight price differences (such as BTC/USDT vs BTC/ETH). Traders can profit from these gaps by reselling the same asset across different exchanges and pairs.
Understanding What Are Trading Pairs in Cryptocurrency
What is a cryptocurrency pair exactly? It’s composed of what’s called the base currency (first pair) and quote currency (second pair):
- The base currency is the one that’s tracked on price charts. In crypto investing, base currencies are almost always non-fiat currencies.
- The quote currency is the unit that compares the base currency price change.
Both currency terms are just liquidity roles. Technically any currency can take either role. They can also be correlated or uncorrelated (most common) depending on the analysis strategy.
For example, the USDT quote currency may not be available on certain platforms, so they use the next most stable tokens instead (Bitcoin and Ethereum).
Cryptocurrency Pairs That Facilitate Arbitrage Opportunities
Arbitrage opportunities occur when crypto exchanges have received high trading volume for a low-liquidity token, offsetting the price compared to other exchanges. CEXs can mitigate this by using the same token pool for various pairs (e.g. the same Bitcoin balance for BTC/USDT, BTC/ETH…)
In DEXs however, every pair represents an independent liquidity pool. Instead, users temporarily deposit both tokens and earn fee revenue when other traders exchange them.
As traders use up the supply of one token, its price is increased by an automated market-maker algorithm (AMMs). This creates another arbitrage opportunity to rebalance the supply for that pair.
Conclusion
Cryptocurrency pairs are essential for exchanging cryptocurrencies and understanding price relationships. They reveal arbitrage opportunities and can help everyday investors diversify better by observing price correlations.
