If you travel abroad often, you’re probably already familiar with how easily foreign currency rates can fluctuate. The rapidly changing value of a currency could allow someone to buy low and sell high, just as stock trading would. However, is it really possible to make money by converting currencies?
It is possible to make money converting currency if you understand the business model. Whether by setting up a brick and mortar currency conversion store or by trading foreign currencies online, there are numerous ways to make money off of foreign currency conversions.
The rest of the article will cover all you need to know about making money converting currency and an alternative way to make money from currency fluctuations without handling physical cash. Keep reading if you’re thinking about trading foreign currencies as a way to generate some passive income.
Making Money as a Currency Converter
Currency converters make money by selling their base currency at a higher price than it costs them to get it to a customer in need of it.
For example, if 1 USD=1.28 CAD at the interbank market, a currency converter will aim to sell their USD to a Canadian in need of it at a price higher than 1.28 CAD.
The extra profit from the transaction goes into buying more USD or into the dealer’s savings.
So, the profit you stand to make as a currency converter is dependent on someone else’s willingness to pay a bit higher than the interbank rates. You also need to have a regular source to buy the cash at excellent rates.
If you sold 1 USD to a Canadian tourist at 1.35CAD in the example above, you’d need to buy more USD at around the interbank rates or close to make a profit if you intend to remain in business.
Here’s a table illustrating the transaction for a $100,000 deal.
|Money Received From Canadian Tourist||Money Sold to Canadian Tourist||Profit from the Transaction (assuming re-purchase at interbank rates)|
|135,0000 CAD||100,000 USD||7,000 CAD|
At interbank rates, the 7,000 CAD profit will buy you an extra $5,460, which you can either add to your capital or book as profit or use to buy even more foreign currencies. Of course, these assumed profits are generous, but it paints a picture of how currency converters can make money.
Also, market fluctuations mean that you may not always get the same interbank rates for every purchase. It may swing your way or against you depending on the prevailing economic situation across the two countries.
How To Become a Currency Converter
Currency converters in the mold above go by various names in different countries. Each country has set rules and regulations for becoming a registered currency converter if you want to launch the business officially.
If you’d rather not go through the bureaucratic bottlenecks, you can stick to exchanging money online by matching up with people on social media and the myriad of peer-to-peer trading platforms.
If you have any popular cryptocurrency trading apps, you’ve most likely seen at least one of these platforms.
Once you’ve settled on your business model and have secured a source of regular funding, the next step is to market your services and attract customers.
Again, the business approach will determine what you do here.
A fully registered business will have an offline presence (usually near tourist hotspots), so they don’t need to do more than installing eye-catching signage.
For a private peer-to-peer trader, you have to put more effort into attracting your target audience.
A busy social media profile and a verified trading profile on the platforms you work on are good starting points. Also, in such a low-trust environment, you’ll need to embrace the use of escrow services (again, already available on many peer-to-peer currency conversion platforms).
Virtual Currency Trading
There’s another approach you can work with if the idea of dealing with physical cash and working hard to attract customers doesn’t appeal to you. It’s a virtual system of trading where you still take advantage of price move fluctuations, but without really buying or selling any physical cash.
When you read about forex trading or online currency exchange trading, the author is almost always talking about this trading style.
With forex trading, you buy or sell a set amount of a base currency in exchange for the counter currency.
It’s why the tradable currencies come in pairs like the GBP/USD or EUR/USD.
If you buy GBP/USD, you expect the USD to weaken against the GBP over the period you intend to hold or until you reach a certain profit level. If you’re right and the market does indeed move according to your prediction, you can make a profit.
The profits you can accumulate on one trade will vary based on the trade size, your profit target, time in the market, and of course, the actual market movement. Forex trading is also known as CFDs (contracts for differences) trading.
How To Engage in Virtual Currency Conversion
You can start trading currencies virtually by doing the following:
Learn the Basics
As with most things, there is a learning curve to overcome with virtual currency trading. You need to learn the terminologies and understand how to navigate the platforms. Fortunately, there are tons of resources available to you online.
Find a Broker
Like cryptocurrency exchanges, forex brokers provide the enabling environment to participate in the markets. There are tons of them to choose from, but you need to exercise caution to avoid choosing brokers without a good track record.
Create a Strategy
In the physical currency conversion business, you only have to source cash and find customers. If you can’t find customers, you still have your capital. In virtual currency trading, it’s a different story. Every wrong trading decision leads to a loss of your capital.
Therefore, you need a proven strategy to increase your chances of success. After nailing down a strategy, try it out on a practice account before moving real money to the platform.
You can make money converting currency either as a physical foreign exchange dealer handling real cash or a forex trader trading virtual currencies. Either way, you need to devote time to understanding the business and crafting a workable plan to increase your chances of success.
If currency trading sounds too complicated for you, consider these other passive income sources.