Prediction Markets: Crowd sourced wisdom

A platform with the potential to transcend countries and become a leading indicator of future events.

Crowd Sourced Wisdom

In 2016, media pundits had Donald Trump at long odds to find his way into the White House. Many news outlets had his Democratic rival Hillary Clinton at an 80% chance of winning the US Presidency.

When Donald Trump ultimately took out the race and became 43rd President of the United States, the conversation quickly changed, with many asking how these supposed experts got it so wrong

As data science and the power of computers rapidly evolves, so does the ability to for us to make better predictions about future events.

Prediction Markets

That brings us to a growing field known as Prediction Markets, that look set to shake up both financial and betting markets.

A prediction market, unlike a traditional financial market, frame themselves in terms of questions. Those questions have binary (yes or no) outcomes and they allow people to effectively place wagers on the result.

So last year when we were in the midst of a presidential election, users could have suggested the question, “Will Donald Trump win the US Presidential Election in 2016?”

Users then have the ability to buy shares in the outcome of the event that are priced according to the likelihood of their success.

A prediction market is effectively a large betting pool that draws in all available information and factors that are currently available.

The Downfall of Polls

One of the key reasons that the experts and even betting markets got the result of the US Election so wrong, was that the information was based predominantly on polling data. As it turned out those supporters of Donald Trump were less inclined to make it publicly known that they were going to vote for him. This meant that polling data was heavily skewed in favour of Hillary Clinton.

Betting markets had been framed using polling data and much of the money from punters was also based on those same misleading polls and media coverage.

As prediction markets grow and are able to draw on larger pools of liquidity from across the globe, the markets themselves become far more accurate and incorporate more accurate information from intelligent sources.

As a result they have the ability to transcend countries and become leading indicators of future events.

Regulation

The idea of prediction markets isn’t a new one, with the concept first surfacing in the 1990’s, however they haven’t been able to attract a significant audience in which to increase liquidity and also the accuracy of the predictions.

This has been due in large parts to regulation. As with the gambling world, regulation varies significantly from country to country and even state to state. Trying to build a worldwide platform isn’t easy and the closest thing we’ve seen is a betting platform such as Betfair which shook up the traditional bookmaker model.

Anonymity

The key to overcoming the regulatory hurdle and one of the key reasons that prediction markets are starting to gain traction is cryptocurrencies.

Digital currencies have been growing in recent years, with the advent of Bitcoin, Ethereum and others now making their way into the mainstream. The ability for users to make transactions anonymously with digital currencies allows access to these types of platforms away from the reach of regulatory oversight – for the time being at least.

This means that unlike traditional betting markets, prediction markets can attract a global audience, which is free of Government inverting and their regime of taxation.

Gnosis

Recently a new prediction market platform successfully raised $12.5 million in a token auction. The Gnosis platform is based on Ethereum and the successful auction shows the keen interest in both the platform and its potential to shape prediction markets in the future.‘Crowd sourced wisdom’ is their tagline.

Gnosis uses Ethereum not only as a tool for payment, but as a part of its core model. Previously a provider of prediction markets would hold payments, but with Gnosis the process is purely peer-to-peer.

While it’s still early days for both digital currency and prediction markets, it seems like a natural fit. Unless governments intervene and find ways to regulate and tax the rapidly growing area of cryptocurrency, then the world is in store for far more powerful tools for prediction in the coming years.