There are thousands of cryptocurrencies existing in the market today that can be exchanged for each other and fiat either by direct trading or by proxy.
The main cryptocurrencies that can be bought directly using fiat currency, or sold directly in exchanges are Bitcoin and Ethereum. Most of the other cryptocurrencies can only be purchased within the same exchange for other cryptos, hence there has to be an established relationship in terms of value between cryptos being exchanged for one another.
Trading Pairs Explained
Every cryptocurrency has an independent value against an accepted universal currency that continually varies depending on the prevailing market conditions affecting it. For instance, as at the time of writing, the value of one Ether in USD is $176.96 while the value of one Litecoin is $76.82.
Each of these values on their own have been determined by the effect of economic and market factors affecting their demand and supply. However, in order to define a unique relationship between these two, the ratio of their values needs to be simply calculated.
Using the Ethereum (ETH)/Litecoin (LTC) example, the relationship between them in terms of ratio (i.e. ETH/LTC) describes what we have as a trading pair.
How Are Cryptocurrencies Traded?
Cryptocurrencies are not traded in isolation. Therefore, for every given trading pair, buying or selling the pair actually involves both sides of the trade at the same time. However, the primary action of execution affects the crypto on the left hand side of the divide, while the opposite occurs to the crypto on the right.
For instance, using the ETH/LTC example, to buy the pair means that one is buying Ethereum and selling Litecoin at the same time, while selling the pair means to sell Ethereum and buy Litecoin simultaneously.
What determines the particular action to take in order to make profit depends on a traders knowledge of the market and ability to make accurate predictions. Making accurate predictions results in profits, otherwise, losses may be incurred.
The trading process is usually complicated with most existing platforms, especially due to the fact that some cryptocurrencies cannot be exchanged directly. This is about to change with the innovation by tap, offering platform apps and cards that will enable seamless trading across a multitude of trading pairs, and easy transactions for retail purchases.
This system will enable traders to focus more on analysing the markets and making proper decisions, rather that concentrating on technicalities that do not have direct implications to their trading ventures.