A friend of mine was confused lately.

He was smart and was able to smell the whales far ahead. He always watches WhaleAlert like a hawk, and when he saw the big amounts of BTC being moved to Bitfinex (his primary exchange), he called it off and took his profits early. The rest of us were waiting for 11k.😭

Upon the great fall a few days ago, he began to pick up the scraps of Ethereum and Bitcoin. He picked up ETH at 89 and 95 US Dollars respectively. He didn't want to sell those, but he wanted to increase them for free.

So he started trading some pairs against ethereum. The pair he traded the most was MANA/ETH.

Now MANA also lost half of its value along with others. But the exchange rate of MANA/ETH remained the same.

He was confused, and being a newer trader, he reached out to me and I explained it to him.

I then decided to create this post as a guide to how exchange rates in the crypto world work.

Let's use this analogy. Say you want to buy tomatoes with your US Dollars.

A tomato costs a dollar. That's how it has always been.(assuming).

This means that 2 dollars gets you 2 tomatoes. 3 dollars get you three tomatoes and so on.

But one day, the cost of producing tomatoes becomes lower. It causes the price of one tomato to fall to 0.5 dollars.

This means that with the same amount of dollars that used to get you just 1 tomato before, you can now get 2 tomatoes for that same amount.

Say the value of the dollar decreased. In that case, the amount you previously paid for one tomato won't be enough to get you one tomato anymore. You'd have to pay the previous value of two tomatoes to get one tomato.

Now, if both the cost of production for tomatoes increased, and at the same time the value of the dollar increased, then what happens?

Well, it becomes more expensive to create one tomato, but the purchasing power of the dollar evens that extra expense out. This means that the rate of exchange didn't change at all, and $1 still gets you  1 tomato.

Although the VALUE of that dollar should be able to get you 2 tomatoes, the amount the dollar contains allows you to get one tomato at the current price. It's simple economics.

Transfer that tomato analogy to the exchange pair.

If the value of Ether went up, but the value of Mana remained the same, then if we were trading the MANA/ETH pair, we'd be able to buy more MANA for the same price of Ethereum than before. The opposite is the case for an increase in MANA's price, but Ethereum's remaining the same.

But what happened in my friends case was the last tomato analogy. Both MANA and ETH fell by almost the same percentage, so their exchange rate remained the same.

And this is why trading ethereum pairs is much safer than trading fiat pairs. Because the ethereum tokens are linked to Ethereum's price, and therefore their exchange rate doesn't fluctuate with the fiat market.

I hope you enjoyed the post and learnt something new.