Knowledge base

Stablecoins, Bitcoin, and Altcoins: How Trading Pairs Operate

Trading in the global financial markets requires thorough theoretical preparation. It is no wonder that hundreds of thematic books and thousands of webinars and courses have been created for trading newcomers. Moreover, preparing for cryptocurrency market trading requires special diligence because digital assets have become part of the global financial markets relatively recently.

That is why today we will carefully examine all the components of this intriguing world of virtual money that attracts many traders worldwide.

The Three Pillars of the Cryptocurrency Market

All digital assets can be roughly divided into three categories. The first and most widespread is Bitcoin, the second is stablecoins, and the third is altcoins. Each of these groups has its own peculiarities.

1. Bitcoin

Bitcoin (BTC) is the world's first digital asset. Its emergence was truly revolutionary for the world because cryptocurrency started to be considered as a digital alternative to fiat (traditional paper) money and gold. Furthermore, for many, Bitcoin even became preferable to paper money due to several important distinctions:

  • Limited emission. Fiat money is printed by government institutions. Sometimes excessive printing of paper currency leads to its devaluation - inflation. In the case of Bitcoin, such a scenario is completely excluded. Its emission is limited by a special program, and the maximum possible circulation is 21 million coins.
  • Absence of third parties. BTC is an electronic payment system that allows for anonymous transparent transactions over the Internet without intermediaries (banks and financial organizations). Users of this system can transfer coins directly by sending them from one electronic wallet to another.
  • Decentralization. Unlike the familiar traditional money, the value of which is regulated by the state and central banks, Bitcoin is a decentralized system. Its operation is supported not by a single central authority but by a large number of users.

Over time, the popularity of the first cryptocurrency, Bitcoin, began to reach overly impressive levels, and the load on its network increased to a critical level, leading to a decrease in transaction speed and an increase in fees for users. All of this caused serious dissatisfaction among users, and the question of finding an alternative to Bitcoin in the near future became acute.

2. Altcoins

That's when altcoins began to appear. Basically, these are digital assets created after BTC. Currently, their share in the cryptocurrency market reaches 40%.

Mostly, the first altcoins represented a minimally modified program code of Bitcoin. This is how Litecoin emerged, a digital coin that was both very similar and dissimilar to its older sibling at the same time. The key difference was that Litecoin had four times higher throughput, and it used a new encryption algorithm called Script.

Sometimes altcoins were created as a result of branching from another digital asset after a blockchain system update. This is how Bitcoin Cash and Bitcoin Gold came into existence.

An important distinction of alternative coins from Bitcoin lies in the fact that their developers set goals different from BTC. For example, the popular altcoin Ethereum allows the creation and deployment of decentralized applications and smart contracts.

However, like Bitcoin, all altcoins operate independently on their own networks based on distributed ledger technology - blockchain.

3. Stablecoins

One of the most prominent characteristics of the cryptocurrency market is its volatility (price fluctuation). To combat this negative phenomenon, developers of digital coins came up with stablecoins. These are altcoins whose value is backed by stable financial assets: global currencies (US dollar, euro), commodities (gold, silver), or other digital coins. Thus, the price of a stablecoin corresponds to the value of the asset backing it.

However, sometimes stablecoins are not backed by anything. For example, the value of the coin Carbon is regulated through additional issuance.

Despite the fact that the term "stablecoins" is always used alongside Bitcoin, these coins have certain characteristics that make them different from the first digital asset:

  • For instance, one of the most popular stablecoins, USDT, is backed by the US dollar, and its value matches the market exchange rate of this currency. Hence, it is logically inferred that USDT cannot be mined.
  • Most often, the issuance of stablecoins is not limited.
  • The most popular stablecoins are issued by registered centralized organizations. For instance, Tether issues USDT, and the consortium Centre issues USDC.

How Do Trading Pairs Work?

The three categories of cryptocurrencies mentioned above are paired together in trading pairs. Beginners in the market often start trading with the BTC/USD trading pair because the US dollar or stablecoins are known for their maximum stability. The second most reliable is the good old Bitcoin. Finally, altcoins are the most unpredictable.

Regarding the relationship between the components of these three pairs, in the case of BTC/USD, it's quite straightforward. An increase in BTC always leads to an increase in the coin's value in dollars, and its decrease results in a reduction in the cryptocurrency's equivalent in dollars.

However, when it comes to trading pairs like Bitcoin/USD and altcoin/USD, things are much more complex. We will further examine several of the most common combinations.

Bitcoin Increased in Price

example, the price of BTC surged from $10,000 to $11,000. Meanwhile, the altcoin's price remained unchanged at $10. In this scenario, the situation looks as follows: when Bitcoin was priced at $10,000, the altcoin's price was 0.001 BTC. When the main cryptocurrency jumped to $11,000, the altcoin fell to 0.00091 BTC. This means that to buy the altcoin with BTC, you would need 9% fewer bitcoins. However, in fiat currency terms, you would still need the same $10.

Bitcoin Decreased in Price

Bitcoin is Stable, Altcoin's Price Increased/Decreased by $1 BTC is priced at $10,000. The altcoin's price rose from $10 to $11. In terms of bitcoins, this change looks like this: an increase from 0.001 BTC to 0.0011 BTC, which is an 11% increase. The same algorithm applies when the altcoin's price decreases from $10 to $9, resulting in a 10% decrease in its value in BTC.

The Bitcoin and altcoin prices changed simultaneously. The most crucial question in this situation is: which cryptocurrency will grow faster - the altcoin or Bitcoin? If BTC rises from $10,000 to $11,000, and the altcoin falls from $10 to $9, then the trader's profit in bitcoins will decrease by 18.1%.

Thus, the profit in trading with BTC/USD and altcoin/USD trading pairs depends on the rate of growth or decline of the components of these currency pairs.