The upcoming Presidential election in the United States has drawn attention to an exciting and emerging market. So, I wanted to explore and explain the fascinating world of prediction markets. 

In this edition, we’ll explore the history, mechanics, and potential of these unique platforms and how they are shaping the way we forecast future events.

What Are Prediction Markets?

Prediction markets, also known as betting markets, information markets, or idea futures, are exchange-traded markets created for trading the outcome of events. They leverage collective intelligence to forecast future events, with market prices indicating the marketplace’s belief about the probability of the event.

The History of Prediction Markets

The concept of prediction markets dates back centuries. The sanctuary of Delphi in Greece has been a byword for prediction ever since Croesus, the king of Lydia, conducted a classical version of a prediction market experiment some time in the early sixth century BCE. The idea is to create a group of people who will make a testable prediction about an event, such as "Who will win the 2024 presidential election?” People in the market can buy and sell shares in predictions.

The Rise of Crypto-Based Prediction Markets

In recent years, crypto-based prediction markets have gained popularity. Platforms like Polymarket and Manifold Markets have emerged, offering users the ability to trade on the outcomes of future events using cryptocurrencies. These decentralized markets are not subject to the same regulations as traditional prediction markets, making them more accessible to a global audience.

How Prediction Markets Work

Prediction markets operate on the principle of supply and demand. Traders buy and sell shares in predictions, with prices fluctuating based on the perceived likelihood of the event occurring. If the event does occur, the trader receives a payout; if it does not, the trader loses their investment.

For example, let’s look at one of the Olympic games predictions on Polymarket. Currently, there is a wager on whether or not Raphael Nadal will win a gold medal at the Paris Games. Since opening, the market set his odds as low as 12% to as high as 51%. 

So what does this mean?

• The price of a share in the prediction "Nadal will win a gold medal in Paris" reached a low of $0.12 (12%). 

• More traders now believe Nadal will win, so the current share price is $0.30 (30%). 

• If Nadal does win, traders who bought shares at $0.30 would receive a payout of $1.00, a $0.70 increase, while those who said no would lose their investment.

• NB. On Polymarket your shares are liquid and could be sold at any point before the event happens. 

The Advantages of Prediction Markets

Prediction markets have several advantages over traditional forecasting methods:

• Accuracy: Prediction markets have been shown to be more accurate than traditional opinion polls in forecasting election results.

• Engagement: Prediction markets encourage engagement with the democratic process by incentivizing users to research and make informed decisions.

• Accessibility: Crypto and Web3-based prediction markets are accessible to a global audience, allowing anyone with an internet connection to participate.

Current Landscape of Prediction Markets

The landscape of prediction markets has seen significant growth. The market leader, Polymarket, received a $45 million Series B funding round led by Peter Thiel's Founders Fund and existing investors 1confirmation and ParaFi. Also participating was Ethereum co-founder Vitalik Buterin, and Eventbrite co-founder Kevin Hartz in the round that officially made Polymarket a crypto unicorn. 

Polymarket

Polymarket has witnessed a meteoric rise in both users and volume. Active monthly traders went from over 4k in January to nearly 27k in July. Year-to-date, the monthly wager volume has witnessed a low of $39 million and a high of $172 million. 

The rise is likely powered by the popularity of political wagers. The largest and most popular wager is the “President Election Winner” market. There has been nearly $350 million waged so far, with Vice President Harris’ shares skyrocketing after President Biden’t announcement on Sunday. 

The Future of Prediction Markets

As we enter 2024, prediction markets are poised to play an increasingly important role in forecasting future events. Prediction markets are essentially polls but are even more valuable as the user puts capital behind a belief. 

In conclusion, these platforms have the potential to revolutionize prediction by leveraging collective intelligence and the power of the crowd.

Stay tuned for more insights and analysis in our upcoming editions.