Betting on Tomorrow: A Primer on Prediction Markets
And the companies that stand to lose the most
Many on Wall Street have written prediction markets off as another form of gambling. A new way for the degenerate generation to bet on everything while providing nothing of value.
The Bear Cave believes the skeptics are dead wrong. Prediction markets are a form of betting, but with a beneficial byproduct: reliable information. By providing everyone with better information to make better decisions, prediction markets will serve as a disruptive force in media, gambling, finance, technology, and countless matters of public interest.
Let’s explore some examples.
Consider the prediction markets on the “Rotten Tomatoes” scores of movies. Rotten Tomatoes aggregates critics’ movie reviews, and moviegoers often use the percentage of positive reviews to decide which films to watch. However, the aggregated Rotten Tomatoes score is often unavailable at a movie’s release and can fluctuate significantly in the weeks after, making it hard for consumers to rely on Rotten Tomatoes scores to decide whether to watch a new movie.
Movie prediction markets, however, can inform consumers whether a movie will be high-quality, even before any reviews have been published. Professional bettors will look at data such as embargo dates for reviews (how early studios allow critic reviews to be published serves as a proxy for a movie’s quality), the track record of the director and major actors, the studio’s effort in promoting the film, the film festivals and critics to whom the studio first promotes the movie, and other data. Then, through prediction markets, bettors express their well-researched views and generate a projected score before a film’s release. This information can be used by consumers to make better decisions on their movie habits and exemplifies how prediction markets can identify, digest, interpret, analyze, and quantify complex information to help people make better decisions.
This magic of prediction markets can be applied to matters of more substance.
Prediction markets can help executives determine whether certain legislation will become law, help Florida homeowners assess the risk and severity of hurricane season, help furloughed workers predict how long the government shutdown will last, and help content creators understand whether TikTok will be banned. Prediction markets are most useful for people with the least reliable information, such as civilians in war-torn areas.
Polymarket offers several markets on whether and when Russia will capture certain portions of Ukraine during the ongoing war. When viewed strictly as betting, these markets can appear like “monetizing human conflict as a spectator sport.”
The Bear Cave would argue differently.
These markets serve as the best source of information for Ukrainians considering fleeing their homes, and more prediction markets about events in war zones will save civilian lives by providing actionable insights on future invasions, strikes, and the loss of key infrastructure.
And while not perfect, prediction markets are beneficial because they are better than the alternative: relying on mainstream media. This is partly because prediction markets only incentivize accuracy rather than views, clicks, selling subscriptions, or catering to the crowds. The financial incentives for correct predictions also mean these markets often surface information the mainstream media misses and unlock talent previously ignored.
For example, one legendary trader with millions in lifetime profits under the pseudonym “Domer” famously tracked private jets during the 2008 election and deduced Sarah Palin was the Vice Presidential nominee by finding an overnight flight from Alaska to Ohio in the hours before John McCain’s running mate announcement — a level of diligence well beyond traditional media. More recently, traders predicted the Nobel Peace Prize winner hours before the public announcement by finding a semi-public media upload on the Nobel website.
Now marks a turning point for prediction markets to enter the mainstream because they have market liquidity, momentum, and funding which will combine to catalyze explosive expansion.
Liquidity is seen in the data. Below is Kalshi’s booming volume.
Growing volume begets more volume as it leads to lower spreads and bigger wins, which in turn attracts more users.
Momentum is linked to volume but is also measured in the public mindshare. In September, South Park dedicated an episode to prediction markets. Last month, Tom Brady suggested viewers of the Ravens vs Chargers game, “Check the Polymarket.” And last week, the world’s biggest podcaster cited Polymarket odds to the world’s richest man.
Two days ago, venture capitalist Aaron Miller wrote about how the mindshare momentum could continue:
“If The Wall Street Journal writes about Tesla today, they’ll embed Tesla’s stock ticker in the article. That stock price is seen as an objective metric for company performance. If event contracts gain the same credibility, the Journal could one day include in the same article the Kalshi odds of Tesla hitting delivery quotas this quarter.
You could even imagine Kalshi or Polymarket becoming a ‘dictionary word company.’ Just like you’d Google Taylor Swift’s tour dates, you’d check the Kalshi of when she’ll release her next album.”
Funding for Kalshi and Polymarket has also arrived by the billions. Last month, Polymarket raised $2 billion at a $9 billion valuation and Kalshi raised a $300 million funding round at a $5 billion valuation and is reportedly seeking more funds at a $10 billion+ valuation.
This money will doubtless be poured into new ad campaigns promoting prediction markets to the masses.
One of the most insightful commentators on the interplay between legacy betting platforms and prediction markets is Mr. Adhi Rajaprabhakaran, an early Kalshi employee and author of the prediction markets newsletter “50¢ Dollars.” On a podcast last month, Mr. Rajaprabhakaran was asked about how incumbent sportsbooks should view prediction markets. He said, in part,
“You can’t just brush it off. I think a lot of gaming industry people, a lot of sell-side analysts, they are writing stuff like, ‘of this is so small, so whatever, it’s just a pimple on the side of the industry…’ and my response to that is ‘I’m sure the meteor looked really small to the dinosaurs when it was really far away. And it gets bigger and bigger…’ And part of my job here is I’m deep in the data, I’m tracking it really closely and I can see how big the meteor is getting…” (22:47)
The Bear Cave has identified several companies and sectors that will be affected by the prediction market meteor.