Predict
There is a lot of hullabaloo on prediction markets right now. It smells, feels and looks like betting/gambling but it’s being positioned differently. So I looked into why folks say it’s different.
Betting: When you bet on a soccer game or election, you’re buying a fixed or pre-priced product from the house/bookie. The house sets the odds/price and their profit margin is baked in. And users can’t resell it as they have to wait for the transaction to complete.
Eg: We bet $100 on Team A at -150 odds. That means we must risk $150 to win $100 profit. Which means betting $100 gives you a $66.70 profit if we win. Payout = $166.70.
Outcome 1: Team A wins, we receive $166.70. Profit = $66.70.
Outcome 2: Team A loses, we lose $100. Zero profit. We can’t exit the bet early as we’re locked in.
Prediction markets: Is being positioned as a stock exchange for future events. You trade with other market participants not a single entity. Prices move based on demand and supply. Each contract pays out, usually $1 if the outcome happens, or $0 if it doesnt. And the price reflects the consensus probability of an event happening. You can also buy and sell early/anytime and don’t have to hold until the outcome.
Eg: A binary contract that pays $1 if Team A wins, $0 if Team A loses. Let’s say the market price is $0.60 per contract, ie market believes there’s a 60% chance Team A wins. We buy 100 contracts at $0.60 each: total $60.
Outcome 1: Team A wins, we get $1 × 100 = $100. Profit = $100 - $60 = $40
Outcome 2: Team A loses, we get $0. Loss = $60
But we could have sold those contracts at any time before the game and if the market price moved to $0.80 (ie probability of wins goes to 80%), we could sell and lock profit in without waiting for the result.
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The downsides to betting are well documented. For predictions markets:
Isn’t this another form of betting/gambling?
Would you classify them as securities, deriavaties, gambling etc?
Liquidity can be an issue without users, leads to inefficient price changes which leads to mispriced markets
Manipulation by insiders can game markets and skew prices
Predict outcomes on human lives (eg, a spaceship blowing up) - terrible
Whales can distort outcomes
Running on crypto rails, not exactly user friendly
What if there are non-binary resolutions where those event outcomes are chaotic/disputed
I don’t know where the puck will end up here from a regulatory pov (I also don’t care too much as it’s not for me) but there are more things I dislike than I like about this.