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The Prediction Market Pickle

Polymarket's users are picking a President; can they build the ultimate market for truth?
Jack Inabinet Jack Inabinet Jul 9, 20243 min read
The Prediction Market Pickle

Interest has never been higher in the Polygon-based prediction market Polymarket.

The platform, which allows traders to create markets around an infinite number of “yes” or “no” outcomes, has caught fire amid a chaotic and volatile U.S. Presidential election. Traders seeking to make a buck off their conviction in which candidate will come out on top have placed hundreds of millions of dollars in bets on the platform over the past several months, pushing Polymarket's business metrics and its name recognition to new all-time highs.

Polymarket has undoubtedly achieved incredible success this year, but with its top nine prediction markets all related to the Presidential Elections, can it keep the momentum going and revolutionize how unbiased information thrives in an AI age?

Today, we’re discussing what the post-election future holds for crypto's buzziest prediction platform 👇

Prediction markets can bring speculation to just about anything.

As bettors place their own capital at risk to participate in these markets, many crypto idealists see prediction markets as excellent arbiters of truth and believe they will continue to grow to infiltrate the mainstream as ultimate sources of unbiased information.

But while prediction markets are often cited as valuable mechanisms for speculation and hedging, limited market demand makes it difficult to achieve such functionality in reality.

Although permissionless prediction infrastructure can supply accurate information in certain contexts, these markets are missing the vital combination of savers, gamblers, and savvy sharps needed to maintain momentum.

Source: Works in Progress
  1. They don't receive continuous streams of passive inflows like stocks, bonds, and crypto from savers due to their zero-sum nature, which makes it difficult to generate returns over the long term without an edge.
  2. Gamblers certainly enjoy placing bets through Polymarket, but this category of user isn't interested in the vast majority of Polymarket’s available markets, which lack a dopamine hit because of their non-immediate payouts and niche topics.
  3. Without a continuous flow of uninformed investment from these two key demographics, small market sizes make it unprofitable for advantaged sharps (think market maker) to correct prices and drive markets towards reality, dismantling their promised functionality of providing accurate insights across every market.

So, yes, Polymarket makes accurately observing the probability of a given event easier for ordinary people, but the protocol is undeniably hamstrung by limited liquidity and amounts of profit that can be extracted across markets.

Instead of speculating in the “Will weed be rescheduled in 2024?” Polymarket with only a couple hundred dollars of at-the-money liquidity and a 15 cent spread between yes and no, potential market participants are likely better off trading industry-associated stocks.

One could theoretically “hedge” their money market portfolio against potential Federal Reserve rate cuts in the July meeting through Polymarket, however, such hedge is best expressed through existing derivatives on Fed Fund futures, which offer vastly deeper liquidity and increased capital efficiency through leverage.

While striving to provide unadulterated knowledge through financially incentivized prediction markets to anyone is a laudable goal, Polymarket faces a tough road ahead in achieving the adoption for such use cases due to the absence of demand in ancillary markets and interest from U.S. regulators to crack down on its leading politically tinged elections contracts.

It's undeniable that Polymarket will attract speculators as long as crypto exists, but prediction markets appear to lack the idealistic utility that bulls insist on.

Polymarket has been a rare success story during a cycle where retail investors have been largely absent, but with many predicting a massive purge from the platform following U.S. General Elections in November, it's tough to bet on their indefinite expansion.

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Jack Inabinet

Written by Jack Inabinet

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Jack Inabinet is a Senior Analyst with a passion for exploring the bleeding edge of crypto and finance. Prior to joining Bankless, Jack worked as an analyst at HAL Real Estate where he conducted market research and financial analysis for commercial apartment development and acquisition activities in the Seattle region. He graduated from the University of Washington’s Michael G. Foster School of Business and remains based out of the Seattle area.

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