Prediction Markets: Betting on Uncertainty

In just 20 days, the US Presidential election will come to its conclusion, and with that, all the debate, social media frenzy, and market volatility will take a breather

With the US Presidential election rapidly approaching, various markets are offering unique insights into the potential outcome of the highly anticipated race. Among these markets, prediction markets have garnered significant attention, offering a unique perspective on how future events might unfold.

In essence, prediction markets, also known as betting markets, allow users to place bets on the occurrence or non-occurrence of an event. These markets function similarly to futures markets, where traders bid up or down for a future contract's price based on their expectations for the future price of the underlying asset.

In prediction markets, a future event is being traded upon, with users voting yes or no to future events, based on which the market determines a price representing the estimate of the probability of the event occurring. The prices indicate what the crowd thinks the probability of the event is.

Prediction markets or information markets belong to the realm of crowdsourcing, designed to aggregate information on a particular topic. This way, it extracts the belief over an unknown future outcome.

These decision markets benefit from the wisdom of crowds, and by collecting and weighing these predictions, we can have a more balanced and reliable market-wide forecast than a single expert’s opinion.

Interestingly, prediction markets aren’t anything new. In fact, the early forms of these markets were political betting.

As per Paul Rhode and Koleman Strumpf, records of election betting on Wall Street can be traced back as early as 1884, with the average betting turnover for each election estimated to be more than half of the campaign budget.

The Iowa Electronic Markets, which is operated by faculty at the University of Iowa, is one of the first modern electronic prediction markets. Then, at Project Xanadu, as per economist Robin Hanson, a professor at George Mason University, the first corporate prediction market was used.

An advocate for prediction markets, Hanson argues, “let us create betting markets on most controversial questions, and treat the current market odds as our best expert consensus,” and then reward real experts for their contributions.

What makes prediction markets particularly attractive is that they are largely efficient. And when it comes to elections, they have been shown to have lower statistical errors than polls and professional forecasters.

Beyond elections, the predictive power of these markets has been seen in industries such as pharmaceuticals and tech, where companies like Eli Lilly (LLY -1.74%), Google (GOOGL +0.3%), and Microsoft (MSFT -0.1%) have used them to forecast product outcomes. Thanks to their visionary value, many large companies use prediction markets as a prognostic tool.

Then, in the summer of 2018, the first decentralized prediction market, Augur, was launched on the Ethereum blockchain. Since then, the prediction market in crypto has exploded, with Polymarket leading this race.

Click here to learn all about buying Augur (REP).

Explosive Growth in Prediction Markets as Elections NearAs the race to the White House enters its critical final stretch, the prediction markets are also picking up steam. In Q3 of 2024, prediction markets grew a whopping 565.4%, according to the latest report from crypto data provider CoinGecko.

This massive growth had the volume on the top three prediction markets reaching $3.1 billion in Q3, from less than half a billion dollars ($466.3 mln) recorded in Q2.

Almost all of this volume, however, belongs to Polymarket, accounting for 99% of the market share in September. Polymarket is an unregulated crypto-based prediction market that covers all kinds of topics, ranging from sports, politics, and crypto to business, science, and pop culture.

During the same period, the betting volume on the platform increased by 713.2%, while transactions grew by 848.5%.

About $1.7 billion of bets, which accounts for 46% of its total volume, meanwhile have been placed on the “US Presidential Election Winner” since the beginning of 2024. This volume has since risen past $1.89 billion on Polymarket.

Just this week, the dYdX Foundation introduced a new derivatives product called Trump Prediction Market Perpetuals, which is pegged to the outcome of the 2024 US presidential election. Using this product, traders can apply advanced trading strategies in order to predict how Donald Trump will perform come Nov. 5.

Traders can take long or short positions on Trump’s election prospects. Then, depending on how election trends change, they can increase or decrease their stakes.

The product comes with features like perpetual leverage, advanced risk management via stop-loss and take-profit orders, and real-time settlement, for which it operates in conjunction with Polymarket’s TRUMPWINYES market.

With US elections around the corner, Polymarket is clearly enjoying a lot of traction and has already raised $70 million in venture funding. Here, traders buy