Editor's note: The crypto prediction market has received a lot of attention in this cycle, and many people believe it is an important representative of the new round of blockchain applications that can break through the circle. Data shows that the cumulative transaction volume of Polymarket, the top encryption prediction platform, in 2024 will exceed US$600 million, and its user base will exceed 150,000. Such outstanding results have even the founder of Ethereum, Vitalik, publicly praised Polymarket for its outstanding performance. But has the crypto prediction market really become popular on a large scale?
The most popular prediction topics on Polymarket are all related to the US election, and the prize pool for predicting the winner of the 2024 US presidential election even exceeds $570 million. However, the prize pools and number of participants for other prediction themes are not too large; apart from the US election, the Paris Olympics should be one of the most popular events in the world in recent times, but the most popular national gold medal ranking prediction prize pool among the Olympic themes on Polymarket is also It is only about US$10 million, which is quite different from the financial volume and number of participants of traditional gambling platforms.
Does this gap also reflect that the encryption prediction market has a certain amount of traffic only in short-term topic industries that the encryption industry is more concerned about (such as the US election), while the popularity and circle-breaking effects in other aspects are not as widespread as imagined. So, what are the factors preventing the crypto prediction market from growing further outward? What is the corresponding solution? Odaily Planet Daily has selectively compiled "Prediction Markets: The Next Big Thing?" written by Min Jung to explore the advantages of the encrypted prediction market and the factors affecting its development.
Key conclusions:
The accuracy of crypto prediction markets is increasing because of financial incentives. These marketplaces cover a wide range of topics from sports to political events, and as blockchain technology continues to evolve, so does platform transparency and trust.
Prediction markets are popular for providing accurate and instant predictions. They allow users to bet on specific outcomes, provide users with novel investment and hedging opportunities, and serve as hedging tools for events that cannot be covered by traditional financial products.
Despite their potential, crypto prediction markets still face significant challenges. Compared to traditional financial markets and sports betting, they are less attractive to both professional investors and casual players, resulting in lower liquidity.
Why prediction markets are gaining attention
The accuracy rate exceeds that of ordinary surveys
The reason prediction market results are worth considering is that using real money as stakes increases the accuracy of predictions. Financial incentives force participants to put more effort into making informed and accurate predictions, and once money is involved in any prediction, individuals are more likely to rationally analyze lineups, past performance, and other relevant details to improve their chances of winning.
Research shows that prediction markets are more accurate than traditional surveys. Berg, Nelson, and Rietz 2008 note in "Market Accuracy in Long-Term Forecasts" that markets involving financial interests consistently provide more accurate forecasts than traditional polling methods. This view is echoed in Liester’s study “Prediction Markets and Political Polling: Predicting Election Outcomes,” where he found that “prediction markets provide better predictive tools for political outcomes.” Such studies have shown that prediction markets produce data that is more accurate than traditional surveys (such as telephone surveys), providing a clearer and more reliable picture of the future of an event. This makes prediction markets a powerful tool for predicting a variety of outcomes, and they are often cited even by trusted media outlets.
“Prediction markets” are specifically designed to predict events such as elections. Although election prediction markets have been around for nearly two decades, to date, comparing predictions and final polls in the run-up to an election with actual election results, we provide evidence that prediction markets outperform polls over longer periods of time. We collected national polls of U.S. presidential elections from 1988 to 2004 and asked whether the polls or the Iowa Electronic Markets' vote share market forecasts from the same period were closer to the two major party votes. Final result. We compared market predictions to 964 polls from five presidential elections since 1988, and prediction markets were closer to the final outcome 74% of the time. Furthermore, when forecasted more than 100 days in advance, the market significantly outperformed the polls in every election. ——Source: "Prediction Markets and Political Polling: Predicting Election Results
Instant updates
The prediction data of the prediction market is updated in real time. While traditional surveys or opinion polls may take hours to weeks to produce results due to slow data collection, prediction markets can quickly absorb and reflect current event information and opinions through financial transactions. This immediacy enables prediction markets to track public sentiment in real time, making it a valuable way for traditional media to obtain the latest information.
New investment and hedging opportunities
Prediction markets also offer new investment and hedging opportunities. Taking investing in a movie studio as an example, from the perspective of traditional financial instruments, one might predict the future success of a movie studio by investing in its equity. Prediction markets allow for more detailed and specific predictions, such as predicting the number of viewers when a certain movie is released. The flexibility of prediction markets enables more precise and targeted risk exposure, allowing investors to isolate risks and express their investment views in a variety of ways.
In addition, prediction markets are similar to traditional financial instruments, providing hedging mechanisms against unexpected events. For example, a New York pizza shop owner worried about the possibility of a blizzard could bet on a prediction market that it would snow heavily, which would act as a financial safety net (hedging tool) to compensate for losses caused by the blizzard. Therefore, prediction markets can further integrate financial strategies into daily life, promote risk management and reduce losses caused by uncertainty.
Source: Polymarket, Presto ResearchPolymarket’s past forecast themes
Factors and countermeasures hindering the development of the crypto prediction market
But the biggest issue facing crypto prediction markets today is liquidity. Even at the peak, attention is mostly short-lived and limited to specific periods like elections, with only the top 3 to 5 predicted topics having enough trading volume for people to make large trades (e.g. $1,000). So why is it difficult for prediction markets to attract liquidity, and how to solve it?
Difficulty attracting professional investors
Although the crypto prediction market has huge potential, its “lose it all or win it all” dichotomous payment structure makes it more suitable for retail investors than traditional investors. While participants could theoretically sell positions before the ruling date, most forecast themes tend to rule in a split second rather than slowly over time. For example, while investors may take profits or cut losses on topics such as "Who will win the most gold medals at the Olympics?" other topics, such as "Will Biden say 'folks' in his inauguration speech?" conclusions, and it is almost impossible to place a stop loss due to the rapid changes in the market. Prediction markets have difficulty attracting professional investors and institutions because of their high volatility and high possibility of losing everything.
Solution: Attract option users
The two-point payment structure of "either lose it all or win it all" also exists in the form of "options" in traditional financial markets. Options are divided into two categories: short-term options or 0 DTE (zero days to expiration) options and long-term options. The former is more speculative and preferred by retail investors, and crypto prediction markets can attract these users (I will discuss why this has not happened later). Long-term options are mainly used for hedging rather than as a tool for direct directional exposure. Simultaneous options are often used in combination with other options or stocks (such as straddles, iron eagles, covered puts) rather than using pure call or put options. Therefore, if crypto prediction markets hope to attract users of long-term options, they need to serve not only as pure “investment” tools, but also as effective hedging tools.
Unable to meet the needs of short-term players
So how attractive are crypto prediction markets to players such as sports betting? The reality is that crypto prediction markets also struggle to attract this segment of players because crypto prediction markets have slower settlement times for bets, are more like a long-term market, and lack the quality themes that can only be traded on crypto prediction markets.
The predicted settlement dates for the top ten topics in Polymarket by volume are as follows, in stark contrast to sports betting where most settlement times are within a few hours or up to a week. For some forecast themes, one does not know when settlement will occur, or even if it will occur before the theme end date.
Source: Polymarket, Presto Research Settlement dates for the top 10 forecast themes on Polymarket
This is also the key reason why it is difficult for crypto prediction markets to attract users of 0 DTE options who like fast settlement. Due to long ruling dates, crypto prediction market returns are not attractive to many users. Even if you bet on a theme with a similar win rate, the payout is only 2x, which is not attractive for crypto-meme coin enthusiasts whose bets may double 10x in 10 minutes. The risk of tying up capital over the long term and the cost of missed opportunities make prediction markets unattractive to those seeking huge short-term gains.
Solution: Design leveraged or interest-bearing products
One way to solve this problem is to design leveraged products so that users can increase capital efficiency. With leveraged products, users don’t have to worry about their capital being tied up for the long term. Other solutions include using stablecoin interest-earning strategies or even designing a lending protocol that allows users to borrow and lend against positions.
Forecasting services without differentiation are unsustainable
The themes of crypto prediction markets today are no different than those of other platforms. Popular topics right now include politics (due to election season), cryptocurrency, and sports. Therefore, there is not much incentive to use crypto prediction markets alone, as cryptocurrency exchanges and sports betting sites provide better liquidity and user experience for these activities.
Source: Polymarket, Presto Research Most trading volume comes from politics and cryptocurrency
Solution: Find suitable and sustainable forecast themes
Currently, crypto prediction platforms like Polymarket thrive on events like elections and the Olympics, but these events don’t happen often and may only drive short-term traffic to the platform. In order for crypto prediction markets to maintain continued user engagement, it is necessary to introduce prediction services that are as long-term and exciting as sports or as regular as CPI releases and Fed interest rate hikes that other platforms do not have. Identifying themes that are unique or suitable for crypto prediction markets is key to its growth and sustainability.
in conclusion
While prediction markets offer unique opportunities and advantages, their impact on the Web3 industry is only beginning to be felt. The threshold for participation is still high, as participants need to be familiar with blockchain-related operations, including the transfer and management of cryptocurrency (such as cross-chain cross-chain and use of MetaMask, etc.). To truly realize the potential of crypto prediction markets, these accessibility challenges must be addressed and the focus placed on creating a more user-friendly experience. It is believed that with the above-mentioned strategic improvements and larger-scale promotion, crypto prediction markets have the potential to redefine how we predict future events and how to manage risk.
[Disclaimer] There are risks in the market, so investment needs to be cautious. This article does not constitute investment advice, and users should consider whether any opinions, views or conclusions contained in this article are appropriate for their particular circumstances. Invest accordingly and do so at your own risk.
This article is reprinted with permission from: "Foresight News"
Original author: Min Jung