The Commodity Futures Trading Commission announced that prediction market contracts based on social media mentions carry a higher risk of manipulation. Which is like announcing that leaving your wallet on a subway seat carries a higher risk of theft.
These contracts let you bet on how many times a word gets mentioned online. Someone tweets "bitcoin" forty thousand times in an hour and collects. The CFTC looked at this arrangement and thought, "We should probably say something."
They started an internal review in August. Took them until now to confirm that yes, when you create a financial instrument based on whether people type specific words into their phones, bad actors might type those words into their phones. Groundbreaking stuff.
The prediction markets defended these contracts as legitimate hedging tools. A hedge against what exactly? The risk that not enough people will spam your keyword? The systemic threat of insufficient engagement metrics?
Retail traders already lost money on presidential elections and Taylor Swift album sales. Now they get to lose it on whether "recession" trends on a Thursday. The innovation here is staggering. We went from betting on actual events to betting on whether people talk about events. Next year we'll have contracts on whether people talk about people talking about events.
The manipulation risk is obvious to anyone who has seen a Discord server. Fifteen guys with bots can move a mentions market harder than the Federal Reserve moves bond yields. But at least when the Fed manipulates markets, they use longer words and better fonts.
The CFTC will probably write new rules. The prediction markets will probably comply. Retail traders will probably find another creative way to set their money on fire while calling it alpha.
Photo by Oren Elbaz on Unsplash
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