A few weeks ago, we unveiled our most exciting feature. Revolut Crypto allows users to effortlessly buy, hold and exchange cryptocurrencies in any of the 25 fiat currencies supported by the app.
As soon as we launched, we were bombarded with questions from our community who wanted to know how Revolut Crypto works behind the scenes, learn where our exchange rates come from, and discover how we could provide instant access to crypto.
How do you buy crypto?
Traditionally, cryptocurrencies are bought via online exchange websites. You can think of these as the digital equivalent of your local farmer's market, but for virtual currencies.
Similar to how farmers and locals meet at the market on the weekend, buyers and sellers get together on virtual exchanges such as Coinbase or Bitstamp to buy and sell their juicy crypto produce.
How does an exchange work?
On the exchange, people indicate how much cryptocurrency they would either like to buy or sell, and how much for. This is known as placing an order.
The exchange then keeps a record of everyone’s requests - made up of loads of buy and sell orders for different currencies, prices and volumes - in a database called an order book.
For example, Bob wants to sell his Bitcoin. He places a SELL order for 1 BTC, asking to receive no less than $18000. Hence, the price a seller quotes on the exchange is known as the ask price.
Once the order is placed, the exchange will look through its order book trying to find a matching order to complete the transaction. It needs to find a BUY order for 1 BTC (or more), from a buyers who is bidding to pay at least $18000 / BTC. Thus, the price quoted for a buy order is known as a bid price.
As soon as a match is found, the transaction is automatically completed and both orders are filled.
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How many prices are there?
Since market participants quote prices on the exchange, there will always be at least 2 different prices - one for buying (bid price), the other for selling (ask price). This is what the different buy & sell orders look like on an exchange:
The screen above shows open orders on the GDAX exchange for LTC/USD. Different prices for LTC are quoted in USD along the horizontal axis, while the vertical axis shows order size.
On the right, the orange line shows all the available SELL orders the exchange is constantly trying to match with the green BUY orders, on the left. These lines move in realtime to reflect existing orders being filled and accommodate new orders being placed every second.
What is the Mid Market Price?
The vertical line in the middle is called the Mid Market Price, or mid rate, which gives the average value based on all the prices advertised for all the different buy and sell orders for that specific currency pair. When you search for any crypto live rates on Google, you are usually quoted a mid market rate.
It's very hard to buy at the Mid Market Rate because order sizes tend to be very small.
If you look on the graph above, you’ll see that as we get closer to the Mid Market Price, the order size decreases. This means that the amount of crypto available on the market at that price is very small, and most people won’t be able to buy or sell crypto at these favourable rates. Most orders get filled somewhere in between the market rate and the outer limits of the graph, where both order price and size increase.
What happens when I buy crypto via Revolut?
To provide exposure to cryptocurrencies in a matter of seconds, Revolut has partnered up with a number of market leading exchanges.
When you buy crypto via the Revolut app, you are quoted live rates on the exchange screen. These rates are streamed directly from the exchanges we work with and are calculated based on the current ask price.
We use the ask price because you are effectively buying from sellers on the exchange who send Sell orders quoting an ask price, or in other words, the minimum amount they're willing to sell their crypto for.
These rates are computed as a Volume Weighted Average Price, before our 1.5% flat fee is applied. This means that we provide the average price of a currency pair that is exchanged over a certain period of time.
The resulting rate is displayed on screen and, once you commit to the exchange, that rate is locked in.
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What is the difference between buying from an exchange vs using the Revolut app?
Exchanges require at least some basic knowledge of financial markets and general trading principles. The best thing about Revolut Crypto is that it’s easy, transparent and fast.
When you place an order with an exchange, you won’t necessarily receive the exact price for your crypto that you wanted to buy or sell. For example, if you place a buy order for a large amount of crypto at the mid market rate, there is a high chance that your order will never be filled.
Revolut removes all of the complexities associated with using an exchange and simplifies the process by offering live rates for buying and selling crypto.
Revolut is perfect for those who want a quick, easy and frictionless way to transact in crypto.
Why does the rate change when I swap currencies on the exchange screen?
This has to do with the 2 main rates quoted on the exchanges - the bid and ask prices. When you buy crypto, you are quoted the ask price, but when exchanging from crypto back into fiat (sell crypto), you receive the bid price.
Since the bid and ask prices are never the same, this explains the rate difference you see on screen.
When you swap currencies (effectively switching from 'buy' to 'sell' mode) the price you see is made up of the various bid rates. These bid prices are once again computed as a Volume Weighted Average Price, with a flat 1.5% fee added to that average.
How do you calculate a rate for a non-traded currency pair? e.g. BTC/PLN
If you're familiar with online cryptocurrency exchanges, then you probably noticed that most exchanges only support a limited number of fiat currencies (if any), usually GBP, USD and EUR.
Revolut Crypto, however, allows you to transact to and from crypto in any of the 25 supported currencies - a first for Europe!
Let's explore how this works behind the scenes by looking at purchasing Bitcoin with Polish Zloty (BTC/PLN).
Once you hit the exchange button, we automatically work out the value of your Polish Zloty (PLN) in Euros (EUR) using the Interbank Rate. This Euro value is then sent to the exchange and used as the base price to give you the correct amount of Bitcoin for your PLN. This process is also known as Cross Currency Triangulation.
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Putting it all together
By now, you should have a good idea of how the world of cryptocurrencies works. Let's sum up what we've learned:
- Cryptocurrencies are a type of digital money with no physical shape or form
- They are bought and sold from market participants on online exchanges
- People on the exchange set the price based on supply and demand
- The bid or buy price will be different to the ask or sell price
- Online price trackers (e.g. the Stocks app on your iPhone) usually show you the Mid Market Price which is an average of all the buy and sell rates
- The Revolut App gives you instant access to Bitcoin, Litecoin and Ether by exchanging to/from 25 fiat currencies
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