July 2024

Prediction Markets and the iGaming Wave

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The US presidential debate at the end of June was a pivotal moment not just for the US election, but also for the breakout of crypto prediction markets into the mainstream. These markets have gone from relative obscurity to being quoted by the New York Times and Bloomberg, with over USD300m currently wagered on the election outcome.

The reason for this breakout is that prediction markets are capturing collective intelligence and are showing themselves to be more accurate and credible than so-called experts or the media. This month we will dive into what these newly popular markets are, how they intersect with crypto and the continued growth of the broader crypto betting and iGaming category.

Prediction markets are platforms where individuals can buy and sell shares or tokens in the result of future events. The market works by allowing a user to buy a “yes” or a “no” token to a specific binary question such as “Will Donald Trump win the presidential election?”. When the market is resolved, the correct answer is priced at USD1 and the incorrect answer is priced at USD0. Before the market is resolved, tokens can be traded freely, allowing participants to move in and out of positions. These prediction markets leverage the wisdom of the crowd and tap into society’s collective intelligence to forecast outcomes in areas like politics, sports, and economics. They have seen renewed interest lately and are using blockchain technology and crypto rails to provide greater transparency, efficiency, and a trustless platform to trade through.

Prediction markets are not a new phenomenon. At the 1916 closely contested US presidential election there was a thriving prediction market forecasting the outcome between President Woodrow Wilson and the Republican challenger Charles Evans Hughes. The New York prediction markets were particularly influential and were often reported in newspapers, providing a snapshot of how the race was perceived. The amount wagered in that 1916 election is estimated to be USD280m in today’s terms, which far exceeded the total campaign expenditures for both candidates. It was equivalent to several days’ worth of trading volume on the New York Stock Exchange at the time.

Today prediction markets are back in the headlines owing to the current US presidential election. Polymarket is the leading platform with over USD240m currently being wagered on the presidential election winner. Mainstream media has been referencing the Polymarket odds as a sentiment gauge of who is going to win and whether President Biden is going to drop out of the race.

Some skeptics look at the current explosion of interest in crypto prediction markets and dismiss the trend as crypto users speculating on alternative events. This is shortsighted. At a time when trust in mainstream media is at an all-time low, prediction markets are providing both prediction accuracy and responsiveness. The recent presidential debate demonstrates this nicely:

  • Prediction market accuracy:
    • Before the debate took place, prediction markets had relatively high odds (23% chance) of Joe Biden dropping out of the race.
    • This was counter to the narrative being told by mainstream media, which dismissed the high odds as partisan bias or conspiratorial thinking.
    • After the debate, it was clear that the markets had been more accurate in anticipating and pricing in political risk.
  • Prediction market responsiveness:
    • During the presidential debate the prediction markets adjusted in real time as the market perceived Biden’s poor performance to have an impact on the election and whether he would drop out of the race.
    • This demonstrates that prediction markets reflect expectations more efficiently and dynamically than traditional polling methods.

Owing to this accuracy and responsiveness, prediction market odds are making their way into mainstream media. In April, the New York Times, Newsweek and Bloomberg all quoted Polymarket odds in relation to Trump’s likelihood of winning the US election, highlighting its credibility as a source for gauging public opinion. The narrative around prediction markets is also changing to become one of “freedom-preserving technology”. Misinformation and the centralized control of information has become an increasing political concern following Russian interference in the 2018 US elections. Financial incentives embedded into prediction markets encourage participants to base their bets on accurate information. As a result, these markets are a valuable tool for obtaining real-time insights and could revolutionize how information is gathered and interpreted.

While viewed as distinct categories, prediction markets and iGaming share overlapping properties, with both seeing a surge of interest. Both categories involve speculating on the outcome of events, where participants are making predictions for financial gain. The primary difference is around time horizons and the purpose of the market. Prediction markets normally take longer to play out (e.g. months for an election) and the purpose is to forecast and aggregate information. iGaming bets take place over shorter time frames (e.g. the length of a football match) and are generally for entertainment purposes. However, the two are starting to bleed into each other with sports betting sites offering election odds and prediction markets starting to create sports markets.

In our Digital Asset Funds, we have positions in two platforms that are well placed to grow volumes and attract new users. BoxBet is an iGaming platform that has integrated with Telegram, allowing it to access a massive base of over 900m users. The user interface is one of the best we have come across, with user onboarding often taking less than 60 seconds and the platform offering a range of features such as parlay and copy betting for its sports book. BoxBet offers an aggressive rewards mechanism that returns up to 50% of revenue back to users to incentivize continued participation and loyalty. It is a very new platform that only launched this year, but already boasts over 1,000 users, covers 309 different sporting leagues and has almost USD1.5m in revenue. While it has started out as a sports betting platform, the BoxBet team is actively exploring ways to incorporate political wagering and other in demand prediction markets.

Where BoxBet has a strong retail user focus, SX Network is squarely focused on institutional and professional bettors for its sports exchange. SX Bet is the leading blockchain sports betting platform by volume across all blockchains. It has processed over USD490m in betting transactions to date. It is a betting exchange and not a traditional bookmaker, allowing it to eliminate vig (the bookmaker's margin) and enhance fairness and transparency in betting. This is highly attractive for professional sports bettors as they can confidently get the best odds in the world on most of SX’s markets. A more recent addition to the SX sports books is the novelty markets section, which includes things like political and cultural events. This shifts SX beyond just the sports betting ecosystem and into the prediction market arena.

At CMCC Global, we are excited by the uptick in interest in crypto prediction markets and iGaming. These are some of the purest financial markets in the world and it is inevitable that blockchain based platforms will be the big winners. On the iGaming and sports book side, the fairness and transparency that crypto brings will win over the business of institutional bettors. Likewise, as crypto wallets and the user experience improves, we anticipate retail users to follow suit. On the prediction market side, we are excited to see crypto platforms used to combat misinformation and provide insights into things like politics and economic forecasts. This can have a real-world impact, contributing to corporate and governmental decision making, resource allocation and risk management. In a world of increasing misinformation and confusion, leveraging blockchain technology and the wisdom of the crowd will help society surface truth from noise.