Tales from Prediction Markets

by ike3 min read3rd Apr 202114 comments

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Prediction Markets
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Prediction markets are fun, at least if you're making money. I've only been into them for a few months, but have already collected a bunch of interesting tales. Note: I may have been involved with some of these, but I'm telling these tales from a third person perspective.

One general point: all of these took place on Polymarket, a crypto prediction market. You can track which accounts place each bet, and so you can see their history of bets, but you can't tie it to an actual person unless they've chosen to identify themselves. You can look at the bet history at Polymarketwhales.info, although there's a ton of bets so it's easier if you know what you're looking for.

The Tesla market. Polymarket had a market on whether Tesla would announce a Bitcoin purchase by Mar 1, 2021. On January 27, an unknown user bet $60k on Yes. This was their only trade on the site, before or after. They won $180k, or 120k in profit. Odds are pretty good it was an insider. Is this insider trading? I asked Matt Levine but he didn't respond. Anyway, there’s another user that lost $242k betting that Tesla would not announce a Bitcoin purchase. This user is affectionately called the "Tesla whale” on the Polymarket discord. They're also notable for losing $92k on the super bowl the day before Tesla made the announcement, and they get honorable mention for having lost the most money on the 100 million vaccine market: see below. As of this writing, the Tesla whale is down nearly $500k.

Watch out for slippage: there was a market on whether Joe Biden would still be president as of Mar 1, 2021. Someone owned around 200k shares of Yes. The market price was very close to $1 each on the morning of Mar 1st, and they apparently decided to sell all their shares instead of waiting for it to resolve; however, there wasn't enough liquidity to sell them all at market price, and they ignored the warning about the slippage the order would encur. Their order ended up executing at an average price of 2 cents, and someone else scooped up those cheap shares a minute later, spending $1k to make $155k; talk about being in the right place at the right time! The initial user ended up with a total loss of $156k on this market. However, even taking that into account, as of this writing they're still up $175k, so don't feel too bad for them. (Note: it's possible they were trying to sell No shares to make a few cents and accidentally clicked on the sell Yes side; without confirmation from the user we can't know what they were intending. Regardless, if you've got hundreds of thousands of dollars at stake, double check before pressing buttons. This isn't the only fat finger that's happened, but it's the biggest.) Polymarket has since added a larger warning in red for trades that move the market more than a few cents.

Hashmasks. There was a market on whether the Hashmasks volume ranking on Opensea would be #1 as of Feb 28, 2021. Someone accumulated over 200k Yes shares, then took out a “flash loan” and purchased a Hashmasks from themselves for 130k ETH (worth over $100 million at the time). Unfortunately for them, Opensea doesn't count sales done directly through their smart contract, only one initiated through their website. The market resolved No.

CO2: Polymarket had a market on whether the level of CO2 reported by the Mauna Lua observatory would be over a specific value on a specific day. The number gets reported on the main page once a day, but someone found a page with the hourly data and figured out how to average together the data points to predict the daily number. They made around $10k on the first market and around $30k on the second market. After that, Polymarket stopped making new CO2 markets.

Vaccines: There was a market on whether there would be 100M 1st doses of covid vaccines reported by the CDC by 12PM EST on April 1st, 2021. The market was made before daylight savings time went into effect, and most people had assumed that Apr 1 data would not be posted by that time. Around two weeks before the deadline, the CDC started posting data earlier - in the 12:50:12:55 range ET. This was before 12 EST, so people realized that, if Apr 1 data was posted at that time, the market would technically include it. A week later, the CDC started releasing later in the day, and the market crashed hard. In the end, the CDC released April 1 numbers too late to count, and the numbers were just short of 100M anyway. We hit 100M on Apr 2nd, after 1PM. This market had $7 million in volume, and very nearly came down to what time the CDC happened to post the data on the last day.

Many people seemed to confuse the total doses given and what the market was actually about, which was first doses. On the day that total doses hit 100M, the Tesla whale spent over $200k on Yes at an average price of around 75 cents. There's been speculation that they thought it was over because total doses had hit 100M, but that can't be known for sure. However, multiple people showed up in the Discord that day asking for the market to be resolved since it hit 100M.

Souljaboy: There was a market on how many times Souljaboy would tweet during a given week. The way these markets are set up, they subtract the total number of tweets on the account at the beginning and end, so deletions can remove tweets. Someone went on his twitch stream, tipped a couple hundred dollars, and said he'd tip more if Soulja would delete a bunch of tweets. Soulja went on a deleting spree and the market went crazy. Multiple people made over 10k on this market; at least one person made 30k and at least one person lost 15k.

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Whilst these stories are wild lets not forget that in the "real" markets also have had a lot of wild stories over the same time period:

  • GME
  • Archegos
  • Greensill
  • Citi/Revlon
  • Texas Electricy

My point is less "these stories aren't interesting" (they are) and more "interesting things happen in lots of markets". Try to avoid weighting too much on "prediction markets are weird" and more "markets are weird".

Prediction markets are tiny compared to real world markets. Something like $100 million total volume on Polymarket since inception. There just aren't as many people making sure they're efficient.

"After that, Polymarket stopped making new CO2 markets."

If the hourly information is public, it seems to me that this user did nothing wrong.  After all, the market was inefficient. They got it closer to the real market price.

After hanging out in the Polymarket zone for a while, it became clear to me that there are at least two pretty distinct groups of people -- the +EV veterans who have fun trying to beat the market and make money, and the gamblers who like to play the game of betting on their opinions and seeing who makes bank. The latter group doesn't really like it when the +EV people find a "clever" edge like this because it makes the game less fun and fair-seeming.

There exists no third group that really wants an accurate up-to-date prediction of the CO2 level printed on the website as of the next day.

From what I can tell, most of the people who lost significant sums on the CO2 markets were generally profitable and +EV. Although I guess I'm mostly seeing input from the people who hang out on the discord all day, which is a skewed sample.

Because mr co2 guy was clearly making a -EV bet that happened to pay off this time :)

Cool.  These are all pure zero sum bets, right?  Where the EV for the 'average' better is $0?

It's actually a bit worse - there's a 2% fee paid to liquidity providers, so if you only bet and don't provide liquidity then you lose money on average. Of course you can lose money providing liquidity too if the market moves against you. Anyone can provide liquidity and get a share of that 2%.

It's plausible to use betting markets to hedge other bets and make a net profit even if within the prediction market all bets are zero sum. 

That's especially true if the prediction market prediction includes insider information based on which it would be illegal to trade stocks and the stock market hasn't yet included the information so that there are opportunities to hedge bets in both markets against each other.

So essentially you're saying you can benefit from insider trading information indirectly without legal culpability.  Fair enough.

Essentially, people can provide information into the prediction market and then another party can aquire that information to make a profit. 

That's true whether the information that's given into the prediction market comes from insider information or from the analysis very skilled superforcasters.

Prediction markets are also effectively insurance markets. Buying insurance is essentially zero-sum but it allows the person who buys the insurance sometimes to engage in risks that are net profitable. 

If you have a prediction market about whether businesses have to lock down, businesses can effectively insure themselves in the prediction market. 

I think it's plausible that 2% fees are two high to make PolyMarket an effective market for information but it's something that's generally possible. 

Sure. I was pointing out that providing a market to anonymously sell illegal information skirts the rules. Whether or not this is a net good is subjective. Similar to having bets on whether so and so vip is still alive on a particular date. It means "notanassasin007" can buy in to that bet the day before and assassinate the vip.

Actually isn't liquidity a problem? Let's say someone is really really certain a specific vip will die. (Queue a movie scene of someone assembling a sniper rifle with their laptop open to polymarket). But if the killer tries to bet a million dollars their max gain is the funds invested on the other side of the betting book.

Sure. I was pointing out that providing a market to anonymously sell illegal information skirts the rules.

That seems misleading. "essentially you're saying is X" is saying "a collary of what you are saying is X".

The phrase "illegal information" isn't very straightforward. A doctor does have legal obligations about not disclosing certain information about their patients but a lot of insider information isn't subject to legal obligations against revealing it. 

It's illegal to trade stocks based on insider information but it's not illegal to tell other people a lot of insider information about a company outside of stock trading. 

Actually isn't liquidity a problem? 

The liquidity tells you about the value of the given information that you are providing to the market.