Crypto trading usually involves high risks and potentially high rewards. However, there are also lower risk trading strategies that crypto traders can use.
Read on to learn more about crypto pair trading, how it works and how to make money in a bear market using the market neutral trading strategy.
What is a crypto trading pair?
A cryptoasset trading pair is a set of two cryptoassets that can be traded against each other. The value of an asset is measured against the other asset it is associated with.
An example is BTC/ETH, one of the most popular crypto trading pairs, as it allows traders to trade Bitcoin against Ethereum.
How does pair trading work?
Pair trading is a market neutral trading strategy that allows traders to bet on one asset against another while unaffected by the overall market direction.
By opening a long and short position on two similar highly correlated cryptocurrencies, traders can make a profit if the cryptocurrency they went long outperforms the cryptocurrencies they shorted.
For example, if a trader believes that Bitcoin SV (BSV) will continue to fall against BTC, he can take a long BTC and a short BSV position with the same risk on both positions. In this case, if the value of BSV falls more than BTC when the trader closes both positions, the pair trade is “in the money”.
What are the benefits of a market neutral pairs trading strategy?
The main reason why prop traders, hedge funds and other market participants invest capital in the pairs trading space is that it is a market neutral trading strategy.
Even if the market crashes suddenly, money can be made from a pair trade, provided the asset bought outperforms the one sold.
In addition, pair trading allows traders to make profits in any trading environment. Whether the market is recovering, correcting or moving sideways, as long as the asset being bought outperforms the asset being sold, pair trading will make money when it closes.
Finally, pair trading is considered a relatively low-risk strategy, which makes it interesting for crypto market participants who are concerned about the high volatility of the crypto market.
Since strong market movements don’t really affect the profitability of pair trades, they can be an excellent approach to trading the crypto markets.
How to make money trading pairs during a bear market
Trading crypto pairs can be a good strategy for active crypto traders during a bear market.
In fact, provided you have the knowledge and experience to simultaneously hold a long and short position, pairs trading has relatively low barriers to entry. All you need is an account with a crypto exchange that allows you to short cryptocurrencies and offers a wide range of tradable assets.
Next, you need to choose the two cryptocurrencies you want to trade and do some research on which one you think will outperform the other. Also, make sure they have a relatively high correlation, which is usually the case when dealing with similar assets (e.g. Layer 1 tokens (core protocol tokens, e.g. ETH), DeFi tokens, or metaverse tokens).
You then need to buy the crypto you think will perform better and short the crypto you think will perform worse.
For example, you can buy ETH and sell Avalanche (AVAX) if you think ETH will depreciate less than AVAX during the crypto bear market. For example, if you had made that trade when both assets hit their recent all-time highs in mid-November 2021, it would have been in the money, as ETH has since lost less value than AVAX.
Pro Tip: Keep an eye on costs
When using a crypto trading pairs strategy, keep costs in mind. Fees that can affect the profitability of your trade include trading fees, withdrawal fees, blockchain fees and borrowing fees on your short position.
Even if you make the right decision and the asset you buy outperforms the asset you sell, the costs will eat into your trading profit. So please make sure you are aware of the charges you will have to pay to open and close your pairs trade on your chosen trading platform(s).
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