What exactly are cryptocurrency trading pairs, and how do they function | Cryptocurrency
|What exactly are cryptocurrency trading pairs, and how do they function|
What are cryptocurrency trading pairs and how do they work?
Cryptocurrency trading pairs work like a token swap system. They are digital assets that are exchanged with each other through an exchange. Trading pairs are useful because some cryptocurrencies can only be purchased through other cryptocurrencies. Also, knowing cryptocurrency trading pairs will help you broaden your horizon beyond the top cryptocurrencies you keep hearing about.
Each transaction incurs a gas fee. These transactions are not only inconvenient but also expensive. Let's say you have 0.005 Bitcoin (BTC) and you want to buy 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 buying ETH are negligible ($0.00008). But that is not necessarily a constant value. If you had made an ETH transaction on May 1, 2022, you would have paid $0.001 per transaction, which is 1150% higher! Such is the magnitude of fluctuations in gas rates.
Cryptocurrency trading pairs are also useful when buying a lesser known cryptocurrency. Most exchanges will generally only allow you to buy such coins in exchange for a cryptocurrency that 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, which makes it easy to estimate the value of a coin.
During the early days of cryptocurrencies, when very few blockchains existed, cryptocurrency trading pairs were not a lucrative option. But, since then, thousands of cryptocurrencies have sprung up, and the number of trading pairs in existence today is more than you and I can imagine.
A crypto trading pair is arrived at by correlating two cryptocurrencies and then arriving at their value relative to each other. By doing this, the value of a 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 exchange between tokens is facilitated by decentralized exchanges (DEX), which make it possible to trade cryptocurrencies without a middleman.
But wait, doesn't a DEX also use a blockchain since it's a decentralized platform? So wouldn't that also incur gas fees? Yes you're right. It Would.
However, you would only be doing one transaction instead of the two otherwise required. Also, most DEXs are powered by the Ethereum blockchain and therefore require nominal gas fees. If you want to prioritize your transaction, you can pay higher gas fees and incentivize miners to process it.