Why Investors Need To be Able To Set Limit Orders Without Committing Funds

Volatility is a double edged sword. Without the high volatility, crypto investors would not have generated the level of returns they’ve seen over the past few years. However, those who aren’t careful, are often washed out. With the recent spikes in volatility in digital assets and in popular equities such as Gamestop and AMC, this has never been more true.

Prices can move fast and unpredictably. Massive moves triggered off single tweets are becoming the market norm. Such price action requires more careful execution and inventory management -- intelligent use of limit orders and carefully selected levels can be such a tool.

Limit orders are simply orders that specify a price “limit” on their execution. Limit orders allow a user to, for example, buy a certain asset when its price drops to a certain level or, conversely, offer out an existing position at a specified price. Limit orders give exact specificity on the transaction price and free up users from staring at markets waiting on a price to become available 24 hours a day.

Limit orders are instrumental during periods of market volatility as they give investors more control over the execution price of an asset. 

But they are far from new, and they’ve historically had one significant drawback. They tie up funds. On any exchange, placing a limit order requires locking in those funds while that order works in the market, restricting you from trading with those funds in other ways. Having your collateral tied up waiting on prices to reach your desired level can be hugely capital inefficient.

This is a fact of most exchange designs; it is not, however, a necessity. There are more elegant exchange designs that support orders without full pre-funding and it certainly need not be a fact of life for customers of brokers covering digital assets who have greater flexibility in how customer orders are worked out in the market.

Traders could set up multiple limit orders using the same underlying funds as collateral -- I could work an offer to sell all of my Ethereum at a price of 0.10 against BTC or at a price of 3500 vs USD using the same Ethereum in my account -- if one executes, the other would simply fail. A customer can set up complex combinations of limit orders all without tying up their capital until trades are ready to actually execute.

That’s just the tip of the iceberg. There’s no reason why the funds have to be even on the respective platform at the time. A user could link his bank account to a platform and work an order to buy Bitcoin for the price of 30,000, specifying to draw the funds from his bank account via ACH. No funds are needed on the relevant platform whatsoever until the order is triggered. 

Recently the digital money platform Uphold announced that they would be implementing limit orders that work in just this way. Now, their customers can set up to 50 different orders based upon the same collateral, and they will execute, as they are met, up until funds are exhausted. US users can even set it up so additional capital can be pulled from a registered bank account, if necessary.

In an increasingly complex and fast-paced digital market, traders of all kinds need every tool they can leverage to mitigate volatility and time the market. Traditional tools are great and have worked for years, but it is time to evolve. By reimagining how some of these systems work, new strategies can evolve and the market can become increasingly efficient. It is likely more and more exchanges will recognize this as customer demand grows, but it’s good to see that changes are already being made. 

About The Author

Joshua Greenwald runs Digital Asset Alpha LP, a fund being managed by Uphold Asset Management Ltd. Josh heads up Asset Management on the Uphold platform, a digital money platform serving over 6 million customers in more than 150 countries.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Other Topics