Crowd Money 001: An Introduction to Prediction Markets
The long-tail potential of prediction markets to become a cornerstone of the internet is incredibly significant.
💰 Welcome to Crowd Money, a new monthly newsletter and podcast covering real-money prediction markets. Every month, Andrew and Clay take the Crowd on a tour of these markets giving you insights, trades, and new ideas, and introduce you to top-market traders, researchers, and innovators in the space. Topping it off, we’ll be making trades of our own on a quest for ever-increasing triple-digit returns.
In two weeks, the inaugural episode of the Crowd Money Cast will release featuring an interview with Tarek Mansour, the co-founder of Kalshi—the first CFTC-regulated prediction market. #JoinTheCrowd today to catch the podcast and next newsletter first thing in your inbox.
And don’t forget to ❤️, it’s like a tip—but free!
Welcome to the Crowd
In 1969 sociologist Herbert Blumer developed a crowd paradigm in which he dissociated and defined the different types of crowds that exist by behavior purpose. Sixteen years later, in 1983, scholars Clark McPhail and Ronald T. Wohlstein introduced a fifth type of crowd. And so, until today, the exhaustive list of crowd classifications was the following:
Protest Crowds (5th)
Today, 38 years later, we at Global Guessing are adding a sixth type of crowd to the sociological canon of crowd groupings: the betting crowd.
Crowd Money is a newsletter for the betting crowd, for those people who may not have much in common besides their love and fascination with markets, betting, forecasting, and rationalist thinking.
Betting makes things more exciting, and it often increases engagement with the betting subject. Sports betting, for example, makes a sports game more interesting. It might incentivize a spectator to check box scores more often, talk about a team, or even go to a game. In the same way, prediction markets—exchanges where individuals and funds bet on the outcomes of future events (e.g., Will Gavin Newsom be Governor of California on December 31, 2021?)—have the potential to add a new layer of excitement to life.
All of a sudden, seemingly trivial aspects that support the functioning of our country like various legislation and or monetary metrics have gained importance. We have personally seen individuals tweeting about movements in the Consumer Price Index as if it were the UEFA Champions League knock-out rounds. And that is exciting to us.
At the same time, we know from our experience forecasting geopolitical events and interviewing elite forecasters at GlobalGuessing.com that people can make consistently accurate and well-calibrated forecasts—not from luck, but skill and practice. As we’ll discuss in next month’s issue (subscribe), we believe this fact among others (such as an information desert relative to stocks) means there’s an almost unparalleled opportunity in prediction markets for generating consistent, informed, high-digit returns for talented forecasters. That’s different than GME, AMC, or any crypto-bull run. And that is exciting to us.
Finally, research suggests prediction markets generate more accurate forecasts than traditional prediction platforms (or polls) such as Metaculus and Good Judgement Open. Moreover, the forecasts produced are less biased, less noisy, and more informed than their platform counterparts. And that, too, is exciting to us.
Taken together, you have prediction markets which:
Change how we engage with the future by generating greater personal engagement
Present an opportunity for smart-traders and elite-forecasters to generate consistent, strong returns
Generate more accurate forecasts about the future that can help us better process the news of the day and (ideally) guide our actions about tomorrow
The long-tail potential of prediction markets to become a cornerstone of the internet is incredibly significant, and we hope to track that growth from infancy to an ecosystem of fully-mature, highly-liquid, maker-provided markets.
Let us know why you are interested in prediction markets in the comments, and we’ll highlight some of the answers in next month’s issue!
Market Thoughts | August, 2021
Prediction Market Primer: What Are They?
If you’ve signed up to this newsletter, you likely have had some exposure to prediction markets already. At the same time, the prediction market community is extremely small and it would be presumptuous to assume that everyone reading this regrets not purchasing (more) ‘No’ on Polymarket for last month’s EIP-1559 market. Plus, this will make a useful reference for future use. So here we go!
If an event is trading at 75% Yes and 25% No, the community is saying that there is a 75% chance of the event happening. Each market is correlated with a single event, and that event’s resolution is defined by a settlement criteria which outlines the rules which govern the contract.
When a contract’s resolution criteria comes to pass, bettors on the correct side of the trade are paid out currency equal to the difference between the cost basis of their contracts and ‘1’, multiplied by their number of contracts.
So if Person A had 500 shares of ‘Yes’ at a cost basis of 37 cents (meaning that the market thought there was a 37% chance of the event happening) and their market resolved ‘Yes’, they would be paid out (1-.37)*500 or $315. Given that we can assume Person A paid $185 for their contracts, they would have profited $130.
The Iowa Electronic Markets is one of the most well-known and oldest prediction markets in existence, launching in 1988 for the US presidential election won by H.W. Bush over Michael Dukakis. Currently, the markets are run for educational and research purposes only.
The most popular prediction markets today include PredictIt, Polymarket, Kalshi, SMarkets, and Augur, with other prediction markets sitting at the fringes. Betting markets are also similar but vary in a few ways.
If you are interested in learning more about prediction markets (also known as information markets), check out these great resources below:
Meet Your Maker
One of the most critical and determinant factors in the long-term success of any prediction market is liquidity, and one of the biggest enablers of liquidity in markets is market making.
The early iterations of prediction markets, and many of the large prediction markets today, operate on top of the Ethereum blockchain or a sidechain like Polygon, or others. Consequently, the token space has afforded prediction markets with automated market makers to generate liquidity.
Automated market making is okay, but market making with real financial buyers and sellers is even better. Especially when discussing rapidly-changing asset classes such as event contracts, automated market makers likely would not be able to track well. Many markets have opted for an orderbook system instead. And while ‘organic’ market makers are permitted on prediction markets using cryptocurrency, there are several limiters to their efficacy. The primary limiter is the fact that ETH transactions, for example, require gas, which makes the market making process at times prohibitively expensive. And this may put long-term downward pressure on the prospects of crypto-powered prediction markets.
And this is where real-money prediction markets like Kalshi come in. Real-money prediction markets require CTFC approval and regulation, and also do not have the gas requirement for transactions. Adoption relative to crypto-powered prediction markets is much easier due to the lower friction of having to acquire ETH and learn MetaMask or other crypto wallet software. In essence, real money prediction markets have all of the traits which might appeal to institutional investors who can enter and provide more volume, liquidity, and attention to markets. Kalshi’s API and public market and trade data makes market making (say that three times fast!) easier too, which is auspicious for the industry writ large.
If you’re curious about the future of prediction markets, and want to think more clearly about the long tails of the industry, paying attention to market makers and how accessible marketplaces are to them will be a strong signal to follow.
Market Interviews | August, 2021
Let’s chat. We became interested in prediction markets through forecasting, and it’s clear that we are not alone. We have seen people join the prediction market community from finance, politics, sports, poker, and several other corners of the internet. And as that is the case, we want to highlight the diversity of traders that exist, and also promote the various approaches and strategies to trading that accompany those different backgrounds. So, each month, we will share a (very) brief interview with someone at least tangentially-related to the prediction markets space.
Our first interview for this inaugural issue is very related to the prediction markets space, and you may know him through his shows on YouTube. He’s spoken with top traders from the various prediction market platforms on his show, and has an academic and professional background in finance and politics as well. He has a knack for breaking down the fundamentals of derivative markets, and can often see the financial opportunities beyond the markets themselves. Today’s interview is with Flip Pidot from OldBullTV and the Open Model Project!
Q: Today it is clear that politics can have large effects on, and even drive prediction markets. What will it take to shift that paradigm such that prediction markets begin to affect politics?
A: Prediction markets do already affect electoral politics, at least in fits and starts. Some notable national campaigns have sought either to influence prediction market pricing or to make use of the data they throw off. And as traditional polling had another faceplant of a cycle, newsrooms and consultants alike are increasingly using prediction markets as their primary real-time barometers. But I think things get really interesting when lawmakers and regulators start looking to prediction markets as an input to their policymaking. We're probably still a few years out from that, but it's coming and it'll be a game changer.
Q: What are some of the areas outside of politics where you see prediction markets being valuable? Are those areas more likely to see mass adoption before the political realm?
A: This broader burgeoning asset class of event futures has a perfect use case (which happens to neatly fit the existing regulatory framework) for hedging external financial risk. Using commodity futures to offset adverse exposure to some exogenous risk is a centuries old practice and expanding that from oil, orange juice, interest rates and foreign exchange to an almost limitless range of discrete events with measurable, tradeable risk (whether political, societal, public health, etc.) is a no-brainer.
Q: At American Civics Exchange you have noticed something similar to us at Crowd Money, in that event contracts are truly derivatives, and can be tied to larger events/outcomes. Do you feel that this opportunity is larger than the markets themselves?
A: Yes, by an enormous margin. The market for efficient transfer of the financial risk associated with public policy decisions (as just one - albeit a major one - among the broader range of event futures) will dwarf the more gamified retail versions of the markets we've encountered to date.
Q: What are the two key pieces of advice you would give someone just entering the prediction market space? Are there pitfalls they can avoid? Lessons they can learn now?
A: Be relentless in identifying, confronting, quantifying and correcting for your own biases. Consume content from all ends of the ideological perspective. Don't necessarily give it all equal weight, but be open minded about whether the preexisting calibration of your media diet is tied to sources' reliability (i.e. relative performance in falsifiable claims/predictions) or other less useful factors.
Market News | August, 2021
Since this is the first issue of Crowd Money, the time parameters for news stories in this section are a bit muddled. So this month we will cover (in brief) some of the big stories in the prediction markets space we have been following, and in the future this section will cover stories from the previous month. If we missed an important story, let us know in the comments and we might talk about it in the first podcast episode! If something of import happened in the world of prediction markets we want to analyze it, and break it down. So without further ado, let’s get into the rundown. In no particular order:
It turns out that prediction markets can be pretty accurate, and government officials might want to use that accuracy to gain insights on issues of geopolitical importance
Our question is, do the fat tails of prediction market inaccuracy disqualify them from becoming practical tools for government institutions?
Kalshi is a real-money prediction market with real big potential. The company has had a wild twelve months and has grown from idea to reality in short order. If any marketplace has the potential to see exponential growth it’s Kalshi, so we will be watching its movements closely
Get notified when we release our podcast with Kalshi co-Founder Tarek Mansour in early September by subscribing today.
In June, with the election to decide incumbent Bill DeBlasio’s de-facto successor in full swing, prediction markets were tracking candidates’ performances
PredictIt and Polymarket both opened markets on the election, with prices tracking similarly throughout
With recent election debacles and more money pouring into prediction markets, it will be interesting to see if the cost for fraud rises
Prediction Plays of the Month
Summary of our Portfolio
We thought that it would be fun to do a ‘Road to Glory’ in prediction markets. We decided to start with $100 and make one or more plays each month to see how much alpha we are able to generate. This section will display our total invested/profited each month, followed by some notable plays from the previous month.
Total Invested: $100
Total Profited: $114.62
Total Balance: $214.62
Last month we made a play on Kalshi market HOME-0001 which asked “Will new U.S. home sales be above 750,000?”
New U.S. Home Sales TTM
We used a combination of lumber prices, eviction forbearance, Covid-19 stimulus, mortgage application rates, interest rates, inflation, and historical performance in our analysis of this question. And we were ultimately correct, against crowd consensus, netting us triple-digit returns on our first trade of the series.
If you want to learn more about this play, you recommend you listen to our appearance on OldBullTV from last week where we go over the play and hypothesize what others got wrong.
We will keep you posted on which markets we think we might make plays on next, on Twitter, and monthly in this newsletter, so stay tuned for more!
Plays from the Crowd
This section is one that we are very excited about. From Day 1 of launch, we are creating a subscriber tier for this newsletter. If you are a subscriber, you will gain access to several perks which will develop as this newsletter grows. We are hyped that one of those perks will come into effect next week.
Subscribers will be able to submit their own successful plays to be featured in upcoming releases of Crowd Money. In next month’s issue, we will release our list of sanctioned prediction markets where plays can be submitted from (for next month, all markets are allowed) that will also be featured at the bottom of future newsletters. As more markets come out, more will be added to our list. Our criteria for prediction markets will be found here.
So subscribe and send us your plays! Maybe you can inspire others with your rationale and approach to trades.
How to Submit a Play?
What Makes a Good Play?
A good play is not just about gross profit for us. If you took advantage of clever arbitrage opportunities, noticed an overlooked signal for a market, or attempted a new or cool strategy, we’re interested!
The Month Ahead
Now for some housekeeping:
If you want to submit plays and you want to have more of a conversation about it, come find us in the Prediction Markets Discord server! We like to discuss plays there and get feedback on our content.
Over the next month we will be working hard to create some great content on prediction markets for you all. If you have ideas, want to contribute, know a potential guest, or just have feedback please reach out to us!
We are excited to share that Crowd Money will be working with Kalshi moving forward. If there is Kalshi content you want to see, reach out to us with ideas!
Finally, if you came to Crowd Money through Global Guessing, or just have an interest in geopolitics, check out our live weekly podcast This Week in Geopolitics! As more geopolitics-related markets spring up, we may cover the fundamental geopolitics trends supporting those markets.
Thank you for reading the first issue of Crowd Money! If there are topics you’re interested in, you have feedback, or just want to say hi, you can follow us on Twitter at the links below: