Even though the 60th US presidential elections are set for November 5th, around 25 million voters have already participated via mail-in ballots or early in-person voting, per Election Lab at the University of Florida.
Such a high engagement spilled over into prediction markets, as Robinhood (NASDAQ:HOOD) announced the trading of election derivatives on Monday. The popular fintech platform is clearly capitalizing on the ruling in September that permitted Kalshi EX LLC to list contracts for event betting purposes.
After the Commodity Futures Trading Commission (CFTC) lost the appeal in early October, Kalshi opened up the space for this new market. Effectively, this means that US investors can participate in political contracts already offered by Polymarket, which had to restrict its offering to non-US clients after the $1.4 million penalty in January 2022.
The question is, should retail traders view this as an opportunity or a trap?
How Do Prediction Markets Work?
Out of many benefits of blockchain-powered smart contracts, Polymarket focused on real-world event outcomes. The platform is built on Ethereum’s sidechain Polygon, as a layer 2 scalability solution to lower transaction fees and facilitate near-instant trades.
Anyone with a self-custodial wallet could participate, of which MetaMask, Phantom, Coinbase (NASDAQ:COIN) Wallet and WalletConnect are supported. As of Monday, the attestation checkbox for not being a US citizen is still present.
Predictably, the hottest betting event now is US presidential elections, having generated $2.6 billion trading volume as a winner-take-all contract. By volume, this is only followed closely by who is going to win by popular vote (as opposed to electoral college counting) at $491.2 million.
The participation range for any event, on either side of the outcome, is always between $0 to $1 per share. If former President Donald Trump wins, for “yes” at 66.3 cents per share, the payout would be $1 per share.
Conversely, if current VP Kamala Harris wins, for “yes” at 33.8 cents per share, the yield would be twice as profitable because that would also turn into a $1 per share payout. And because this is a 1 winner-take-all contract, betters on the wrong outcome will receive nothing.
Are Prediction Markets Worth the Risk?
Betters should take note the odds displayed for each contract do not correlate with winning chances. After all, only a small percentage of the population participate in this tier of fintech service. According to a Paradigm survey in March, around 1 in 5 US voters own crypto, which means that even fewer than that would participate.
Moreover, given that Polymarket X account itself is frequently replying to Elon Musk, the owner of X and open supporter of Donald Trump, this would additionally bifurcate Polymarket odds from reality. Beyond political contracts, betters could also be very wrong on general market trends.
Up until mid-June, over 70% of Polymarket betters were counting on Nvidia (NASDAQ:NVDA) not becoming the world’s most valued company. But the minority of optimists ended up winning instead. Nvidia indeed became the most valuable company on June 18th at a $3.3 trillion market cap, surpassing Apple (NASDAQ:AAPL) and Microsoft (NASDAQ:MSFT).
Therefore, when looking at any event odds, be it on Polymarket or new Robinhood Legend, investors should always keep in mind that event chances are skewed by biases and improper sampling.
Furthermore, a winner-takes-all participation is a zero sum game. This is in stark contrast to investing in established dividend stocks for passive income that offer minimal exposure risk. In other words, retail participation in prediction markets should be confined to the old maxim – bet as much as you are willing to lose.
The Bottom Line
Given that Kamala Harris was an impromptu presidential pick, combined with her incumbency within the historically lowest-approval Biden admin, it is not difficult to see why prediction markets would lean toward her opponent Donald Trump. But even disregarding sampling and other issues mentioned, betting on a high-likelihood is still a low-yield bet in the prediction markets.
Such binary offering is as attractive as it is simplistic. But investors who don’t like the zero sum game would do better with passive investing in the long run.
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Neither the author, Tim Fries, nor this website, The Tokenist, provide financial advice. Please consult our website policy prior to making financial decisions.