Prediction markets hit a milestone this week. They confirmed that most of their markets don't have enough money in them to function as markets. Exponential growth sounds impressive until you check the base number.
Turns out launching a thousand contracts on whether a D-list influencer will tweet about soybeans does not guarantee liquidity. The volume went exponential. The useful volume stayed at zero. Math works that way when you multiply nothing by ten thousand.
Several markets never crossed ten grand. That's not a market. That's a group chat with a spreadsheet. You need actual money changing hands to establish a price. Without it you get volatility and bots. Bots love thin markets the way sharks love bleeding fish in shallow water.
Retail traders waded into these puddles expecting efficient price discovery. They found three hundred dollars in total volume and a bot that updates every four seconds based on nothing. The spread between bid and ask was wider than their understanding of how market making works.
Every single contract promised wisdom of crowds. What they delivered was the wisdom of Carl, two bots named after Pokémon, and a guy who fat-fingered his entire position at 2am. Carl left after his first trade. The bots are still there. They will always be there.
The platforms marketed this as the future of forecasting. They built the infrastructure. They wrote the smart contracts. They added the leverage. What they forgot to add was counterparties. Hard to make a market when nobody wants the other side of your trade on whether it will rain in Belgium next Thursday.
Prediction market evangelists will call this growing pains. They will say liquidity follows adoption. They will cite the efficient market hypothesis like it's scripture. None of them will mention that their flagship market on the presidential election has more volume than their next five hundred markets combined.
The future of forecasting looks a lot like the present of penny stocks. Illiquid, manipulated, and populated exclusively by people who deserve exactly what happens to them.
Leave a Comment