Mr Viral
Trump’s Polymarket odds are 53.3%, and the platform has a $1B trading volume in the US elections.
Derivative markets can be a force for good, sometimes reflecting a more accurate representation of people’s beliefs.
But they can also bring downsides, like undermining people’s trust in democratic elections and inviting emotional betting on high-profile topics.
Betting on the US elections is the new drug of choice for international traders. And it might be a better reflection than actual election polls, according to a statistics professor.
Elon Musk also believes the same.
Polymarket recorded over $1B in trading volume on the US elections, and a user known as Fredi9999 has over 7.8M Trump shares (Polymarket shares that Trump would win the elections), worth $6.4M.
Former President Donald Trump sits at 53.3% winning odds, with a 2.4% increase in the last 24 hours. However, according to a crypto fund partner, many pro-Trump bettors appear to be driven by personal belief rather than strategic market belief.
This is not necessarily at odds with our current understanding of market forces, which are at least partly driven by sentiment rather than fundamentals.
Polymarket election bets could also raise another problem – the commercialization of elections. Which could undermine public trust.
Let’s dig deeper and see what Polymarket’s role is in the wake of the upcoming US elections.
The Good News – Polymarket More Accurate Than Election Polls
Here’s how Polymarket’s US election betting works:
One share ranges from $0 to $1
Shares reflect the probability of Trump or Harris winning
If Trump’s shares cost 63 cents a piece, he has a 63% chance of winning
Shares of a winning candidate rise to $1 automatically after the event ends (elections)
At first glance, you’ll think it’s pure speculation – people driven by monetary gains trying to make a profit. And you’d be right, to an extent.
However, Harry Crane (statistics professor at Rutgers University) offers a different perspective in a comment on the Commodity Futures Trading Commission’s (CFTC) portal.
In an interview with Cointelegraph, Crane also claimed information reflected by market prices is harder to control.
Perhaps that’s why the CFTC tried banning derivative markets in 2024. Fortunately, Columbia District Judge Jia Cobb rejected the proposal.
Crane has good reasons to praise derivative markets like Polymarket. In two peer-reviewed studies (2018 and 2020), he found that ‘sentiment is what polls measure, accuracy and truth are what markets seek to measure.’
The idea is that:
Polls ask about who you want to win
Markets want you to say who you think will win
In other words, one expects an emotional analysis, while the other wants a logical approach.
Grant Ferguson (director of public outreach at Texas Christian University) agrees and says that prediction markets ask people to ‘think logically about what is true, not what they want to be true.’
Apparently, when you stand to make or lose money, you’re much more likely to put aside personal preferences and analyze the situation strategically.
But is this true for election betting?
The ‘News’ – Trump Is Winning the Elections on Polymarket
The 2024 elections are getting nearer – less than a month away. And Trump is currently winning, according to Polymarket. He’s at 53.3% victory odds on a two-month high.
At the center of this blazing rise sits Fredi9999. If you’ve never heard of him, you probably should have.
He’s the biggest holder on Polymarket and has over 7.8M Trump shares, valued at around $6.4M. He’s 100% Trump and still buying, according to current data.
Some traders have speculated Fredi could be Musk or someone connected to him. These are unfounded claims, to be sure, but such a superlative investment begs the question, ‘Who is he?’
Fredi9999 looks like a wealthy (and fervent) Trump supporter, but he could also be a market manipulator, according to John Stefanidis, CEO of Real World Gaming (predictions and wagering platform.)
In an interview with Decrypt, Stefanidis said that it shouldn’t be an issue in the long term, even if Fredi is manipulating the market.
Genuine sentiment and analysis tend to prevail in prediction markets. Or does it?
The Bad News – Emotions and Money Ruin Democracy?
Prediction election markets also have a dark side or two.
1. Commercialization of elections could undermine the public’s trust
Cantrell Dumas (Director of Derivatives Policy at Better Markets) warned against derivatives markets, claiming they should ‘adhere to strict oversight and the academic, non-speculative model.’
Otherwise, they could further deepen suspicions that elections are ‘rigged’ or ‘fraudulent,’ as Trump once claimed about the 2020 elections.
Commercializing the elections through betting could further ‘degrade’ the democratic role of the elections, further undermining the public’s faith in them.
2. Emotional betting could skew market results.
Curiously, Trump’s recent rise on Polymarket isn’t tied to any significant polling data or campaign developments. Instead, many ‘abnormal’ users vote for him ‘regardless of how irrational the bet is,’ according to Adam Cochran (crypto fund partner).
The market has a mind of its own, and so too do politicized traders. Cochran also says this ‘irrational’ betting on Trump is skewing the market results through a feedback loop.
Nate Silver (founder of FiveThirtyEight) said this odd betting is due to market boredom and speculative trading.
Interestingly, he said it’s unlikely bettors are trying to influence public perception because of the liquidity in prediction markets.
Artificially holding a position at a higher bet is too expensive, according to Silver.
Instead, most bets should be coming from opportunistic traders or ‘true Trump believers,’ which would explain Trump’s current winning odds.
Then again, voting is highly emotional nowadays, with identity politics reigning supreme and convincing a lot of people to switch sides or stay entrenched in their decisions.
3. Derivatives played a major role in the 2007–2008 US Great Recession, with Warren Buffet calling them ‘weapons of mass destruction.’
Let’s jump back a few years. It’s 2007, and the mortgage market is thriving due to derivatives (Collateralized Debt Obligations or CDOs). Shadow Banking was pushing many investors toward CDOs, which were becoming more complex and appealing.
The system allowed the issuance of subprime (and sometimes subpar) mortgages to borrowers who were unlikely to make their payments in good faith.
Put differently, CDOs allowed anyone to ‘recycle’ risky debt into AAA-rated bonds, considered safe retirement funds.
However, that’s when the Bankrutpy Abuse Prevention and Consumer Protection Act (BAPCPA) came, increasing the cost of personal bankruptcy.
CDOs crashed almost immediately, opening the way for the Great Recession.
Here’s what Warren Buffet said in a 2008 annual letter.
Derivatives are dangerous. They have dramatically increased the leverage and risks in our financial system. They have made it almost impossible for investors to understand and analyze our largest commercial banks and investment banksWarren Buffet
Verdict – Are Derivative Markets Just a Fad or the Future?
Polymarket’s role in the 2024 US elections is undisputed. With over $1B in trading volume, it’s no longer a question of whether it will impact the elections but how much.
To summarize our findings, prediction markets:
Demand a truth-based approach based on logic (and speculation) rather than feelings
Could skew the public’s perception of the democratic importance of elections
Might still invite emotional betting on highly-debated topics like the elections
Will Trump win the elections just because Polymarket bettors favor him? Of course not.
But is the platform amplifying political debate and influencing the elections? We believe so.
Whether that’s for the better or worse remains to be seen in the coming months and years, as derivative markets will likely gain (even more) popularity.
References
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