Most of us are familiar with the task of exchanging currencies, but understanding the intricacies involved can be a challenge. Currency exchange appears to be a relatively simple transaction; in fact, the mechanics are quite complex.
To help make things clearer, here’s an explanation of a few basic terms that will help you get to grips with how currency exchange works. We’ll explain how they affect your transactions later on:
Under the lens
If you go on holiday abroad – let’s say New York for the weekend – you will need to exchange your base currency into a foreign currency – in this case, dollars. You visit your local bank, post office or currency exchange specialist to do this (they generally all operate the same model) and exchange £100 into USD. The bank offers you a price for which they are willing to buy your £100 GBP. This is the GBP-USD Bid price. In this case, the exchange (Bid) price for £100 might be $125.83 ($1.2583 to £1).
You return from New York on Monday with $125.83 left over, which you want to convert back to GBP. You return to the bank who say that they’ll sell you back your GBP at $1.2783* (the Ask price). As such, you receive £98.44. The difference (Spread) is £1.56, which represents the cost of facilitating and matching buyers and sellers.
The Spread for different currencies is affected by trade volumes, liquidity and volatility in the market. All currencies have different levels of liquidity and market demand, which is why spread costs can vary drastically from currency to currency and have different prices on different exchanges (the risk of market volatility is decided by the institution).
*This example assumes that market rates have not changed during this period.
How does Wirex work?
Wirex is a multi-currency platform that allows you to buy, sell and spend your digital and traditional currencies. When you buy your base currency in exchange for another currency, you pay the Ask price. We use live exchange rates to provide you with the most-up-to-date market prices. You can see the equivalent USD value of your holdings in any of your wallets in the Wirex app. These values are based on the Bid price, so you know exactly what it is worth if you want to exchange it into USD. As stated above, this process is the same across all exchanges.
What sets Wirex apart from other exchanges is that we strive to make the buying and exchanging of digital and traditional currencies simpler and more secure. We achieve this by integrating with 10 different exchanges and 3 OTC institutions to obtain the best currency pair pricing for each customer. Our rates take into account the various liquidity levels on these exchanges, differing exchange fees and limits, available currency pairs and volatility levels in order to match the trades for each customer. It means that we search for the best Bid and Ask rates that we can source at the time of transaction. We do not charge any additional fees on top for processing the transaction, unlike other leading companies. Once you add these additional fees to the exchange rates, you will often find that Wirex gives you a better overall rate/value.
- Exchange rates are made up of Bid prices, Ask prices and Spreads
- All exchanges use the same process for buying and selling traditional and cryptocurrencies
- The Ask Price is always higher than the Bid Price. The difference is the Spread, based on market liquidity and demand
- Wirex uses live exchange rates to provide you with the most up-to-date prices
- Wirex does not charge you any additional fees for processing transactions, unlike most other companies
- Wirex does make the process simple giving you our best rates, no additional charges, and the ability to spend your crypto in everyday life