What Are Prediction Markets in Crypto?
A crypto prediction market is a marketplace where people can buy and sell predictions and bet on the outcome of future events using cryptocurrency. By voting "yes" or "no" to future events, the prediction market determines a price that represents the market's estimate of the probability of the event occurring.
Key Takeaways
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Users bet on future event outcomes using cryptocurrency, buying shares that pay out based on accuracy. Market prices aggregate beliefs into a sentiment barometer.
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Polymarket is the largest prediction market, using USDC stablecoin. Others include AMM-style Polkamarkets and Polkadot-based Zeitgeist.
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These markets incentivize sharing true beliefs through financial commitment. High participation integrates varied views into market-determined probability forecasts.
When can we say we really know what’s going to happen in the future? And if we think we know, are we willing to put those beliefs to the test? Now with prediction markets in crypto, we can. In this article we’ll take a look at prediction markets in crypto, explain the most popular ones, and how we can get started using them.
Prediction Markets In Crypto Explained
Prediction markets in crypto allow you to bet on the outcomes of future events. Topics to take a stance on can range drastically and will often follow the 'current' thing, ranging from climate change to political elections or even supernatural events.
For example, the prediction market that was resolved around the Bitcoin approval date – 'Bitcoin ETF approved by Jan 15?'
People who thought it would be approved before January 15, 2024, bought themselves "Yes" shares for $0.50 meaning they thought there was a 50% chance it would. People who thought this was too early bought a “No” share.
But as we got closer to the date and more bullish signals and news were publicized, more people were convinced the ETF would be approved before the set date. So we saw a rise in price of ‘Yes’ shares and a decline of “No” shares.
With the ETF ultimately being approved on January 11, 2024, the market resolved earlier than expected and anyone who bet on "Yes" and held their shares saw each of their shares become worth $1 immediately. Conversely, any trader who owned "No" shares saw their investment become worthless.
What Are the Pay-Outs Mechanisms on Crypto Prediction Markets?
There are two different methods for getting paid out when your bet becomes reality: fixed payout and pari mutuel payout.
Fixed Payout
This is the most straightforward. A fixed payout is like reserving your prize money upfront. When you place your bet, your possible winnings are locked in right away and do not change later on.
For example, if you buy 300 "YES" shares, you will get 300 points if you are right. It's like putting 300 coins in your piggy bank for a rainy day. The only thing that matters is if your guess is right or wrong – all action after you bet does not affect your payout.
Pari Mutuel Payout
This method pays out by dividing the prize pool between all bettors who won the bet. It's a prize pool where all winning players get their fair share. The more people who win, the smaller each prize will be. The fewer winners, the bigger your share.
Both have advantages and disadvantages – fixed payout ensures knowing your return, while parimutuel could turn in your favor if you take the contrarian side of a bet and win.
The Real Time Sentiment Barometer?
The name "prediction markets" can give a misleading impression, because there is more to it. While predicting outcomes is one goal, prediction markets could also serve as a real-time tool to gauge how people dynamically value and price near-term events.
Understanding this shifting sentiment can provide insight into developing stories and tell us perhaps more about what really is happening and what is not.
Blockchain-based prediction markets may be the one force strong enough to counterbalance the spread of incorrect information on social media. They give people a financial incentive to seek the truth and then protect them with the twin shields of pseudonymity and decentralization.
— Balaji (@balajis) January 20, 2019
While prediction markets could function as sentiment barometers, liquidity remains crucial, as always. As with any market, accuracy tends to improve when volume is high. Some markets have (extremely) low liquidity, thus limiting insights into true expectations. On top of that, we must consider that an event not coming to fruition does not necessarily mean the implied odds were low or vice versa.
History of Prediction Markets in Crypto
Prediction markets are not a new concept in crypto. In 2020, the now-collapsed FTX exchange introduced a similar type of market where users could bet on future events like elections and token prices.
One of the notable examples was the "TRUMP2024" market that centered around whether Donald Trump would run for president again in 2024. Participants could buy (long) or sell (short) contract tokens representing each outcome – if Trump ran, the tokens expired to $1, and if not, became worthless at $0.
Essentially, these "bets" involved going long or short on future contract tokens. However, current prediction markets differentiate in that traders purchase outcome shares rather than going long or short.
Unfortunately, with the bankruptcy of FTX, the TRUMP2024 market will never be settled (on FTX). Another reminder how centralization could pose risks to participants just wanting to bet.
The Significance of Crypto in Prediction Markets
While traditional markets normally only use fiat currency, prediction markets in crypto are unique in their use of cryptocurrency for both placing bets and collecting payouts.
The cryptocurrencies used are stablecoins that are perfectly suited for this purpose. Foremost, the transparency of the blockchain ledger allows full visibility and takes away doubts that users are betting against an opaque third party "house".
Additionally, these stablecoins remain stable and are under the self-custody of each user. Users will only interact through smart contracts and will not deposit cryptocurrencies into a centralized wallet. Lastly, the decentralized nature of crypto makes it possible for anyone from anywhere in the world to use the market, regardless of their location, except for restricted countries.
Some well-known crypto prediction markets we will explore include Polymarket, Polkamarkets and ZeitGeist.
Polymarket: Largest Prediction Market Powered By Crypto
Polymarket is the largest and most popular prediction market in the crypto space. It has the highest liquidity and is most frequently quoted on Crypto Twitter. Polymarket allows its users to access the prediction markets through USDC, a stablecoin 1:1 pegged to the dollar.
Sadly, due to regulatory issues Polymarket is forbidden from letting U.S. citizens trade on its platform. However, people of the U.S. can still view information on the markets.
How Does Polymarket Work?
Just as explained in the previous section, the price or odds represent the current probability of an event occurring according to the market assessment.
For example: In a prediction market on whether Sam Bankman Fried, the former FTX CEO, will be sentenced to 50+ years in federal prison or not, the “Yes” shares trading at 31c indicate that the market thinks there is a 31% chance that he will.
The ultimate outcome of whether SBF is sentenced to 50 or more years in prison will be known by 11:59 PM ET on June 30, 2024.
If traders betting "Yes" are right, this means SBF gets a hard sentence of 50+ years, and each “Yes” share would be worth $1. That’s a 69c profit per 31c share price. Any trader who owned “No” shares would see their investment become worthless. This is peer-to-peer trading.
But it's important to mention that you're not locked into your bet. If you change your opinion, you can sell your position at the current odds anytime before the market ends. So you can always sell when odds seem to shift and you do not want to sit it through until the final verdict.
Limit Orders and Rewards
An extra feature of Polymarket is that it allows users to place limit orders in the order book. This means you won’t have to buy or sell instantly and could bid or ask a lower or higher price than the current market price, similar to regular trading.
On top of that, Polymarket rewards those who fill the order book, similar to maker fees, with rewards being paid out on a weekly basis. For more information on rewards, please visit their official documentation.
Getting Started on Polymarket
Getting started requires knowing how to use a self-custody wallet and transferring cryptocurrency. This is a straightforward process.
Create Account and Deposit USDC
First, create an account on Polymarket, which can be done with a Google account or by connecting your Coinbase wallet or many of the most popular self-custody wallets.
After creating an account, it's time to deposit money to bet with, in this case USDC. Note that you can export your private key, so you control your funds in a wallet of your choice. You can import your Polymarket wallet into another wallet provider, such as MetaMask.
Make Your First Trade
Before making your first trade, explore the available markets on Polymarket to find one you want to predict. Read the market details carefully and understand what position you are taking. Check the liquidity and use the built-in calculator to see potential returns.
Decide on your position and click "Yes" or "No" to place your bet, then enter the amount you wish to wager. As mentioned above, it is possible to create limit orders by specifying your preferred buy or sell price and amount.
Monitor and Cash Out if Right
If you are in a bet or have limit orders set, monitor the market closely. Good luck!
Polkamarkets: The Automated Market Maker Prediction Market
Polkamarkets is a prediction market that operates on Ethereum Mainnet, as well as Moonbeam and Moonriver, but sees most activity on Polygon. Users can directly take positions on real-world event outcomes from within MetaMask, using the stablecoin USDT to interact with the smart contracts.
How Does Polkamarkets Work?
The process is the same as discussed above.
For example, a prediction market on Polymarket where Ledger, the hardware wallet company, will file for bankruptcy before June 1, 2024, has a "No" share trading at 67c. This implies the market thinks there is a 67% chance it will not file for bankruptcy. If this outcome occurs (the company does file bankruptcy), all those who voted "Yes" will be paid out $1 on their 33c share. This follows the same structure of what we've seen before.
But where Polkamarket differs is that they use an automated market maker (AMM) similar to Uniswap. This offers the advantage of constant liquidity, making markets more accessible and eliminating the need for traditional order books. Pricing will be algorithmically adjusted and incentivizes liquidity providers with a share of transaction fees.
The downside of AMMs is the risk of impermanent loss for liquidity providers when asset prices change and potential price slippage in low liquidity conditions. So caution is needed when adding liquidity to these markets.
Getting Started on Polkamarkets
Getting started requires knowing how to use a self-custody wallet and transferring cryptocurrency. This is a straightforward process.
Connect MetaMask Wallet
Connect your MetaMask wallet to Polkamarket by following the prompts. Change your MetaMask network to one supported by Polkamarkets, such as Polygon, through the network dropdown in your wallet.
Browse or Create Markets
Explore existing prediction markets on the platform or create a new one if you have a unique prediction in mind. For this you’ll need 1000 POLK tokens.
Choose a market outcome, buy shares with POLK tokens, and confirm the transaction in MetaMask.
Monitor and Sell
Keep an eye on the market and sell your shares back on Polkamarkets if your prediction changes or to take profits.
Provide Liquidity (Optional)
You can choose to provide liquidity to earn transaction fees, after ensuring you understand the associated risks like impermanent loss.
Other Notable Prediction Markets
There are also other prediction markets available.
Zeitgeist: Prediction Market On Polkadot
Zeitgeist has its own prediction market which is a decentralized platform built on the Kusama network, designed to allow users to speculate on the outcomes of future events.
The market is very new and does not have a lot of liquidity. It uses its native token, ZTG, for creating markets and enabling users to buy or sell shares in the outcome of an event. Users can use Polkadot-compatible wallets such as Talisman, Polkadot.js, or SubWallet.
Manifold Markets: Predicting for Charity
Manifold Markets is a prediction site that is easy to use and has an interesting feature - it donates rewards to charities. Although Manifold does not run on the blockchain or use crypto, it uses its own digital play money called Mana (M).
All users start with M500 for free. Mana can be used to create, subsidize, and promote markets on your own questions. In addition, you can purchase more mana or convert your mana earnings into real charitable donations at a rate of M100 for $1.
Perhaps Manifold will introduce crypto to its platform in the future, or maybe not – we can bet on this prediction using Manifold. Either way, it's a win-win situation.
Conclusion
The key idea is that prediction markets incentivize people to reveal their true beliefs through putting money where their mouth is. As more people bet, the market prices integrate into an accurate probabilistic forecast determined by the market. This could be considered a powerful forecasting tool for events with uncertain outcomes, although the wisdom of the crowd is in some cases close to room temperature IQ.
Hans entered the space in 2017 for the quick gains but ended up staying poor. Since 2020, he has contributed to many crypto projects and has written several blog posts in English and Dutch. By sharing his research and findings, he hopes that everyone reading can make better informed decisions.
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