Two cryptoassets can be traded for each other when they are part of a cryptoasset trading pair. When assets are paired together, they are valued relative to each other. There are typically high risks associated with cryptocurrency trading, but there are also potential rewards. Crypto traders can also employ trading strategies that have a lower risk profile. Learn how crypto pair trading works and how you can use market-neutral trading to make money during bear markets.
Crypto trading is typically associated with high risks and potentially high returns. However, there are also lower-risk trading strategies that crypto traders can deploy.
Read on to learn 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 for each other. The value of one asset is measured in relative terms to the other asset that it’s paired with.
How pair trading works?
Pair trading is a market-neutral trading strategy that allows traders to place bets on one asset versus another while remaining unaffected by the overall market direction.
By opening a long position and a short position on two comparable cryptoassets with a high correlation, traders can generate a trading profit if the cryptoasset they went long outperforms the cryptoassets that they went short.
For example, if a trader believes that bitcoin SV (BSV) will continue to lose value against BTC, they could enter into a BTC long, and BSV short position with the same amount at risk on both positions. In this instance, if BSV drops more in value than BTC by the time the trader closes out both positions, the pair trade will be “in the money.”
What are the benefits of a market-neutral pair trading strategy?
The primary reason why prop traders, hedge funds, and other market participants allocate capital towards pair trading is that it’s a market-neutral trading strategy.
Even if the market suddenly collapses, a pair trade could make money, provided the asset that was bought outperforms the asset that was sold.
Moreover, pair trading allows traders to generate a profit in any trading environment. Regardless of whether the market is rallying, correcting, or moving sideways, as long as the asset bought outperforms the asset sold, the pair trade will make money when it’s closed out.
Finally, pair trading is considered a rather low-risk strategy, which makes it interesting for crypto market participants who are concerned about the high cryptoasset market volatility.
Since sharp 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 pair trading during a crypto bear market
Crypto pair trading might be a good strategy for active crypto traders during a bear market.
Provided you have the knowledge and experience of having both a long and short position open at the same time, pair trading actually has relatively low barriers to entry. All you need is an account with a crypto exchange that allows you to short crypto and offers a wide range of tradable assets.
Next, you need to choose the two cryptoassets you would like to trade and conduct research on which one you will believe will outperform the other. Also, make sure they have a relatively high correlation, which they normally would if they are comparable assets (such as layer-1 (base protocol tokens, e.g., ETH) tokens, DeFi tokens, or metaverse tokens).
Next, you need to buy the cryptoasset you believe will outperform and short-sell the cryptoasset you believe will underperform.
For example, you could go long ETH and short avalanche (AVAX), if you believe that ETH will drop less in value than AVAX during the crypto bear market. If you had put that trade on when both assets hit their recent all-time highs in mid-November 2021, for example, it would have been in the money as ETH has dropped less in value than AVAX since then.
Pro tip: Keep an eye on fees
When deploying a crypto pair trading strategy, keep an eye on fees. Fees that could affect the profitability of your trade can include trading fees, withdrawal fees, blockchain fees, and borrowing fees on your short position.
So even if you make the right call and the asset you bought outperforms the asset you sold, fees will put a dent in your trading profit. So make sure you are aware of the fees you will be paying to open and close your pair trade on your chosen trading platform(s).