Polymarket: Predictor Or Pointless?
Comparing prediction sites to traditional alternatives for key risk events.
You’ve probably heard of Polymarket in recent months, likely in relation to the outcome of the U.S. Presidential election in November. For those not familiar, Polymarket is a decentralised prediction market platform that allows users to bet on the outcomes of real-world events. Think of it as a hybrid between a traditional betting company and a binary options market maker.
It’s a relatively new company, having been formed back in 2020. Yet it has risen to popularity since then, having carved out a niche in which, even though some of the traditional betting platforms offer similar products, the breadth and simplicity with which users can bet make it almost unmatched in the marketplace.
What makes Polymarket (and competitors) interesting to us is the spillover into financial markets. Does the platform provide investors and traders with a better finger on the pulse of what the actual probability of key event risk is? Or is it an irrational market skewed on low sample size or distorted logic?
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How Polymarket Works
Let’s take an example of a case that we’ll come back to later on: who will win the Presidential election next month?
A user can place a bet on two outcomes via four trades. Either a Trump yes/no or a Harris yes/no. A bid on Trump, yes, is the same as an offer on Harris, no.
Polymarket puts a spread on there, as can be seen from the above pricing. So the bid offer on Trump yes/Harris no is 53.5/54.1.
The platform also allows you to see the order book, as you can leave a limit order for a particular level. This is an interesting feature that allows you to see where demand is;
Do Prediction Markets Match With Traditional Alternatives?
A good case to consider here is the outcome of the next US Fed meeting in November. Following the strong payrolls report a week ago, SOFR futures shifted away from pricing in a 50bps rate cut.
In order to look at what the financial markets think the Fed will do next, a trader can look at the 30 day Fed Funds futures price. You can also back out probabilities for different outcomes. A handy tool for this is the CME FedWatch. For the November meeting, this is what is shown:
Even though we appreciate this isn’t a blanket statement, this indicator shows us that the financial markets are assigning an 85.5% probability of a 25bps rate cut (and a 0% chance of 50bps).
Now let’s see what Polymarket is saying: