Cryptocurrencies are inherently difficult to understand; you’ll need to first understand the complexities of the underlying blockchain technology, and then, you’ll need to learn the basics of technical and fundamental analysis. The worst part is that you’ll still need to deal with the incredibly volatile nature of the cryptocurrency market because of its high degree of speculation.
Thankfully, tons of resources, online and offline, have been devoted to demystifying the cryptocurrency trading process. However, of the core tenets of cryptocurrency trading; the cryptocurrency trading pair has not received much attention. This piece provides a simplified overview of cryptocurrency trading pairs for people who don’t have prior experience in trading stocks, forex, or other financial instruments.
Fiat currencies and cryptocurrencies
Fiat currencies are the common government-minted currencies such as the USD, GBP, Euro, and Yen. Cryptocurrencies are decentralized currencies that are not subject to the monetary policies of governments or their agents. To start trading cryptocurrencies, you’ll need to first convert your fiat currency into a cryptocurrency. There are more than 2,000 cryptocurrencies in the market but only a handful of them can be bought directly with a fiat currency.
The “conversion” of fiat currencies to cryptocurrencies is typically done on cryptocurrency exchanges. You should be able to convert fiat to crypto if you start trading on eToro, or other exchanges. In most instance, you’ll only be able to buy Bitcoin, Ethereum, Litecoin, and Bitcoin Cash with your fiat currency.
Base cryptocurrencies and altcoins
A base cryptocurrency is the cryptocurrency against which all other altcoins are quoted on an exchange. The most popular base cryptocurrencies are Bitcoin (BTC), Ethereum (ETH), and Litecoin (LTC). Most of the exchanges where you can buy altcoins typically won’t allow you to buy them directly with fiat currencies. After you must have bought BTC or ETH with fiat, you can use the BTC or ETH to buy the other altcoins that you may want to trade.
The price of base cryptocurrencies is usually quoted against the price of your home/domestic currency. In the chart below, the price of Bitcoin is quoted against the USD, and this is true for other base cryptocurrencies on other exchanges.
In contrast, the price of other altcoins is usually quoted against BTC, ETH, or other base cryptocurrencies as seen in the chart below. The price of Ripple (XRP) is 0.00008895BTC, the price of Stellar (XLM) is 0.00002996BTC, and the price of EOS is 0.00059530BTC.
The simplest way to understand the price of altcoins when quoted in a base cryptocurrency is to think of the quoted price as a ratio. The USD value of BTC is about $3,280 and the USD price of Ripple is about $0.29, which gives us a ratio of about 1: 0.00008895. In the chart above, it will cost 0.00008895BTC to buy 1 XRP.
Calculating the value of your cryptocurrency gains/losses
The first way to calculate the value of your cryptocurrency gains/losses is to use a tool that shows you the relative value of the coins in USD or your native currency. Coin Market Cap shows the price of all listed cryptocurrencies, their 24-hour volume, their market cap, and their price charts, and their ranking among other cryptocurrencies.
The second way to calculate the value of your cryptocurrency gains or losses is watch the movement in value of your altcoins relative to the value of the base currency. When for instance, if you bought 1 BCH at 0.025TC, if 1BCH now becomes 0.050BTC, it means that the value of your BCH has jumped 50% against Bitcoin and selling your BCH now will net you 0.050BTC as opposed to the 0.025BTC you had when you originally spent to buy 1 BCH.
Nicole Hicks a graduate of UFT. She’s based in Toronto but travels much of the year. Nicole has written for NPR, Motherboard, MSN Money, and the Huffington Post. Nicole is a financial reporter, focusing on technology, national security, and policing.