What is a pairs trading in cryptocurrency? Is it different from pairs trading in other stocks or equities? Is it quite a tough one to do? Is it very profitable or just like any other trading strategy in cryptocurrency? These are the usual questions that come to the mind of any person who undertakes, or plans to undertake, a pairs trade in cryptocurrency for the premier time. So as to answer all of these above, we first answer what is pairs trading in cryptocurrency, and then take it on from there.
What is Pairs Trading in Cryptocurrency
While we understand pairs trading in cryptocurrency, there are a few aspects to it, like what is to be done exactly, what is the basic maths involved, are there any strategy algorithms that can be used, what are the risk mitigation strategies that can be deployed and so forth. Let us start with the fundamentals first.
Pairs trading is kind of a trading strategy, which involves picking up two highly co-related assets, like Bitcoin and Altcoin, and entering into a short position for one, and a long position for the other. So it is more of a market neutral strategy, and kind of risk proof. If the long position goes up more than the short, or the short goes down more than the long, both the cases the trader ends up with some profitable money making. Now if there is an ideal situation, that the long position moves up, and the short position moves down, the gap increase, in-turn increasing the profits manifold.
As such, pairs trading, if the pairs are chosen wisely, profit the trader in a number of market conditions, like the price shifts happening up, down or sideways, and the market being very aggressive or very sedate. Cointegration and correlation are two important mathematical derivations used to choose this pair for cryptocurrency pairs trading usually.
What is Pairs Trading in Cryptocurrency: Some Facts
While other stocks and commodities trade against the US Dollar, or any fiat, one has to remember that this is not the case with cryptocurrencies. They actually trade against other cryptocurrencies. Value is established by comparing one cryptocurrency to another. Not only is the established value different for each pairing, but it is also different at each exchange. Now this is something that makes pairs trading in cryptocurrency a bit complex, and difficult to execute, especially for people who do not understand the pairs properly, that is, people who are new to this niche. Many-a-times, traders of other stocks and commodities, venture into cryptocurrency, and they feel that the same principles of a pair trade can be applied to cryptocurrency as well. However, as seen above, this is not the case, and it is better to take help of some industry experts like executium.com first, and learn what is pairs trading in cryptocurrency exactly. There are many dynamics of a pairs trade in crypto that make it really networked and intertwined with a number of market indicators.