10. Crypto and prediction markets

Prediction markets (PM)

In a prediction market a contract pays 1 dollar if an event happens and 0 if not, so its price in cents reads as the crowd's probability, and PM lists these markets by topic.

  • 4 min
  • 3 questions
  • Lesson 3 of 4

Why you would care

What does the crowd think will happen, and how sure is it? "Markets price a 67% chance of a hike in October" can come from rate futures (chapter 08) or from a prediction market. When both agree, you have a cross-check; when they disagree, one of them is wrong or measures something different. Prediction markets also price events no other market covers: elections, court rulings, company announcements.

The idea from scratch

An event contract pays 1 dollar if the outcome happens and nothing otherwise. Its price is between 0 and 1 dollar.

Markets with several outcomes ("How many cuts this year: 0, 1, 2, 3+") have one contract per outcome; their prices should add up to about 100%.

What limits the reading:

  • Spread: the gap between bid and ask in cents. A wide spread means the "probability" is fuzzy.
  • Volume and liquidity: a thin market can be moved by one trader.
  • Fees and the time value of money shift prices slightly.
  • Rules: each market resolves on precise wording; read it.
Diagram: Event: yes or no leads to Contract pays 1 dollar if yes; Contract pays 1 dollar if yes leads to Price in cents; Price in cents leads to Implied probability; Spread and volume leads to How reliable the reading is.

See it in Gloom

Gloom screenshot: PM, Macro tab
PM, Macro tab: event markets on central banks, recession and yields, with the top outcome's odds, the spread and 24-hour volume; venue names blurred here. Historical example.

open ittype PM, or PM fed to search. Category tabs on top (h/l); views Top, Ending, New, Watchlist; a venue filter. Enter opens a market's order book, trades, outcomes, price history and resolution rules. PM is an official plugin: typing it offers to install it.

  1. Fed Decision in October? 67% 25 bps increase: the most likely outcome and its implied probability.
  2. SPR 1.0c: a one-cent spread: a tight, liquid market.
  3. VOL24H $464.4k: money traded in 24 hours.
  4. US recession by end of 202… 12%: a 12% implied chance.
  5. How high will 10-year Trea… 92% 5.2%: a market on a bond yield level.

A market's price history can be plotted next to any other series in the chart composer (chapter 03).

Practice and recap

Try it3 tasks
  1. A YES contract trades at 23 cents. Implied probability? (23%.)
  2. Outcomes priced 50, 30 and 25 cents. What is odd? (They add to 105%: fees, spreads or mispricing.)
  3. Compare the October hike odds here (67%) with the Fed path lesson. What would you check? (Whether rate futures price a similar probability for the same meeting.)
Common mistakes4 mistakes
  • Reading thin markets as reliable probabilities.
  • Ignoring the exact resolution wording.
  • Treating a probability as a forecast that "will" happen.
  • Forgetting that some venues are not open to everyone everywhere.
Check yourself3 questions
  1. What does an event contract pay?
  2. How do you read a price of 40 cents?
  3. Why does the spread matter?
Answers
  1. 1 dollar if the event happens, nothing if not.
  2. A 40% implied probability.
  3. A wide spread means the implied probability is uncertain and costly to trade.
Words in this lesson5 words
prediction market
A market trading contracts on whether events happen.
event contract
Pays 1 dollar if the event happens, 0 if not.
implied probability
The chance a price suggests.
resolution rules
The exact wording that decides the outcome.
liquidity
How easily you can trade without moving the price.

Educational material about reading market data, not investment advice.