Stablecoins, BTC, and altcoins: how do crypto trading pairs work?

Trading in global financial markets requires a serious study of theory. No wonder there are so many books, webinars, and courses on the topic for beginners. At the same time, preparation for crypto trading requires an eye for detail as digital assets have become part of the global financial market relatively recently.

Today, we will scrutinize all the aspects of the crypto world that fascinates many traders.

Three pillars of the crypto market

All digital assets can be roughly divided into three groups: bitcoin (BTC), stablecoins, and altcoins. Each of them has its own features.

1. Bitcoin

Bitcoin (BTC) is the flagship cryptocurrency. Its introduction was revolutionary. Since then, cryptocurrencies are seen as a digital alternative to fiat money and gold. What is more, bitcoin has some notable differences from traditional currencies:

• Limited supply. Fiat money is issued by state-run institutions. Sometimes, an excessive supply of traditional currencies causes inflation, and money becomes less valuable. That will never happen to bitcoin because a special program limits its supply. There can be no more than 21 million BTC coins.
• No third parties. Bitcoin is an electronic payment system. It allows users to carry out anonymous and transparent transactions on the Internet without involving third parties such as banks and financial organizations. This system enables users to transfer coins directly from one e-wallet to another.
• Decentralization. Unlike traditional currencies whose exchange rate is regulated by governments and central banks, bitcoin is a decentralized system. It operates thanks to a large number of users and not a single central body.

Over time, the flagship cryptocurrency has become increasingly popular, with its network heavily overloaded. Consequently, the transaction speed decreased and commission fees went up. That provoked discontent among users who started looking for alternatives to BTC.

2. Altcoins

That is how altcoins, all digital assets created after BTC, came along. They currently account for as much as 40% of the crypto market.

To create the first altcoins, minor changes in the BTC programming code were made. That is how Litecoin was introduced. This digital coin is very similar and yet different from BTC. The thing is that the throughput of Litecoin was four times higher and based on Script, a new encryption algorithm.

Some altcoins are forks from other digital assets. They appeared after the update of the blockchain. That is how Bitcoin Cash and Bitcoin Gold arrived.

The big difference between BTC and altcoins is in their purpose. Thus, Ethereum ensures the creation and deployment of decentralized apps and smart contracts. At the same time, like bitcoin, all altcoins operate independently in their networks based on a blockchain, distributed ledger technology.

3. Stablecoins

Volatility is one of the prominent features of the crypto market. Therefore, in order to avoid price changes, developers created stablecoins. They are altcoins backed by stable financial assets such as world currencies (USD, EUR), commodities (gold, silver), and other digital coins. In other words, the exchange rate of a stablecoin is the same as the exchange rate of the asset that backs it.

Sometimes, stablecoins are not backed by anything. For example, the exchange rate of the Carbon coin is regulated by additional supply.

Although the meaning of stablecoins is similar to that of BTC, they still have their differences:

• For example, USDT, one of the most popular stablecoins, is backed by the US dollar. Its exchange rate is the same as the market rate of the greenback. Clearly, USDT is impossible to mine.
• The supply of stablecoins is mostly unlimited.
• The most popular stablecoins are issued by centralized entities. Thus, USDT and USDC are issued by Tether and the Centre consortium respectively.

How do crypto trading pairs work?

The three above-mentioned groups of cryptocurrencies are combined in trading pairs. Beginners usually start trading with the BTC/USD pair because the US dollar and stablecoins are of the highest stability. Bitcoin is the second most stable digital asset. Altcoins are the most volatile.

When it comes to the correlation between those pairs, in the case of BTC/USD, everything is quite simple. When BTC goes up in price, the coin's exchange rate in dollars also grows. Conversely, when BTC goes down, the value of its equivalent in dollars decreases as well.

However, when it comes to trading BTC/USD and altcoin/USD, things are more complicated here. Let's now thoroughly analyze the most common pairs.

BTC goes up

Let's say BTCswells to $11,000 from $10,000. Meanwhile, the exchange rate of the altcoin is still $10. With the BTC price of $10,000, the altcoin price is 0.001 BTC. When the flagship cryptocurrency jumps to $11,000, the altcoin falls to 0.00091 BTC. This means that to buy 1 altcoin with BTC, you need 9% less BTC. At the same time, to buy 1 altcoin with fiat money, we still need $10.

BTC goes down

BTC is stable. The altcoin price rises/falls by $1

BTC trades at $10 000. The altcoin goes up to $11 from $10. In bitcoin, it is an increase from 0.001 BTC to 0.0011 BTC, that is, by 11%. At the same time, when the altcoin price drops from $10 to $9, its value in BTC is 10% lower.

BTC and the altcoin change in price simultaneously

Here it depends on which cryptocurrency rises faster, the altcoin or BTC. If BTC soars to $11,000 from $10,000 and the altcoin upticks to $11 from $10, the trader's profit in BTC will increase by 9%. If BTC surges to $11,000 from $10,000 and the altcoin drops to $9 from $10, the profit in BTC will go down by 18.1%.

All in all, the profit from trading BTC/USD and altcoin/USD depends on how fast the price of the components in the pair goes up and down.