bitcoin price 5,824.22
Published Tuesday, April 11th, 2017 in

Bitcoin Prediction Markets

A prediction market allows an individual to place a bet on the outcome of a future event. Increasingly Bitcoin is being used to place these bets, and new and existing prediction market platforms are incorporating this form of Bitcoin gambling. A prediction market is made up of market makers and predictors. The market maker simply asks a question, for example “will the price of Bitcoin be higher than $3,000 on January 1st 2018 at 00:00:00 UTC?”. Other players on the platform can then place bets on this market buy buying “yes” or “no” shares, and in many cases the market maker is rewarded with a cut of the bets placed. Once said event is realized, owners of the correctly predicted share are rewarded with a proportional cut of the market’s prizepool.

Bitcoin prediction markets are incredibly useful for two reasons. Firstly, those with specialized knowledge can earn income from correctly predicting outcomes. And secondly, forecasters and researches can harness “the wisdom of the crowd” to make better informed decisions.

You’re probably asking yourself, how is a Bitcoin prediction market any different to one that operates around fiat? The answer is in the technology, not just of Bitcoin – which allows somewhat anonymous payments – but in the decentralized nature of the prediction market platforms themselves. In being decentralized, players and market makers can bet and win with complete confidence in the platform’s resilience to central authorities. There is no possibility of funds being seized or markets being shut down. This decentralization, paired with Bitcoin payments, makes for a compelling solution to the traditional (and largely unknown) form of prediction betting. Bitcoin prediction markets are likely to become very popular in the years ahead.

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How does a prediction market work?

Bitcoin prediction markets are considered “binary”. Current technology limits players to making ‘yes’ or ‘no’ bets. More complex bets are incompatible as they open up intolerable ambiguity within the system (discussed further in the limitations at the end of this article). Once a market is created, players can then buy ‘yes shares’ or ‘no shares’, with each entitling them to a percentage of the market prizepool if their outcome is correct. Shares purchased in these markets can then be held, sold or ‘cashed in’ once the market closes. By dealing in shares, secondary markets also operate whereby players can sell their shares in a particular market – which may also have additional value if the market is no longer accessible to others but there is still demand to place bets i.e. the market size limit is reached, or the market maker decides to lock the market from new bets.

Gnosis.pm have provided this video to help explain the benefits of decentralized prediction markets, as well as the merits of their platform which go some way to summarizing how prediction markets (and therefore Bitcoin prediction markets) are used:

Smart Contracts

We have so far discussed Bitcoin prediction markets, whereby the operation of the market is no different to a traditional prediction market other than the fact that Bitcoin is used as the medium of exchange. With Ethereum, smart contracts can be used to power the operation of each market as is seen in the prediction platforms Augur and Gnosis. We anticipate that the use of smart contracts within prediction markets will displace all other implementations, and that Ethereum will become the dominate blockchain for which prediction markets are built around. Here’s why:

Oracles
Smart contracts can engage with Oracles (truthsayers) which can automatically and trustlessly confirm the outcome of a market. Several Oracles may be used in any given prediction market to ensure a statistically reliable decision is made. On the contrary, prediction markets that do not take advantage of smart contracts will inevitably have some form of centralized decision making, which puts player funds at risk (among other issues).

Scalability
Prediction markets are still a relatively niche form of gambling, however this is likely to change in the near future. As prediction betting scales, traditional Bitcoin prediction market platforms are likely to struggle in terms of labor hours. Those platforms which are able to employ hundreds of staff will face higher costs, and these costs will need to be covered by taking larger commissions on each market. Smart contracts obliterate this almost entirely, and allow platforms to operate semi-autonomously with minimal costs.

Best Bitcoin prediction markets

The reality is that the best prediction markets are those that use the Ethereum blockchain and implement smart contracts. These prediction markets also accept Bitcoin, in the sense that Bitcoin can be used to purchase the given platform’s native token (used for betting). In time, exchanging Bitcoin for these platform-specific tokens will be virtually free and instant and so any prediction market will accept Bitcoin deposits and withdrawals.

  1. Gnosis.pm
  2. Gnosis.pm launches its token sale on April 24th and is expected to become the leading prediction market platform. The company is backed by Consensys whose Ethereum development team is second to none. Gnosis.pm plan to revolutionize price discovery, sports betting, futarchy/governance, insurance and financial markets through their core platform layer. We fully anticipate that they will.

  3. Augur.net
  4. Augur is similar to Gnosis, however they are focused much more on the application layer of prediction markets. Augur expect to have a fully working webapp betting platform ready by Summer 2017, with their current Beta software already available to the public. Augur also have their own Ethereum based token – REP – which trades at a number of highly liquid exchanges.

There are other prediction markets currently active and available such as BetMoose, Fairlay and Predictious, but these all face centralization issues and do not operate using smart contracts. We will be including reviews of these Bitcoin prediction market platforms in due course, but our focus at the moment is given to those Ethereum-based smart contract platforms.

The gambling industry as a whole is being revolutionized rapidly, with very little acknowledgement from key players within the industry (governments and regulators alike). With prediction markets we are seeing a new “grey area” develop due to its similarity with stock markets and share dealing. As it stands, these platforms should be considered a form of gambling, and if gambling is illegal in your country then Bitcoin gambling is certainly illegal too. That said, we anticipate that the value of these markets for predicting future outcomes, as well as the similarities to stock market trading, will see prediction market betting become ubiquitous in the future. Of course those individuals and platforms who wish to subvert laws and regulators (it’s decentralized and anonymous after all) can continue to do so but at their own risk.

Limitations of Bitcoin prediction markets

Prediction markets are no doubt an exciting new area of Bitcoin gambling, however there are limitations that are unlikely to be resolved any time soon. The first limitation is market resolution. Some bets are “clear cut”; for example, “will the Los Angeles Lakers win the NBA Finals?” In this market, the outcome will be well documented by the smart contract’s Oracles and therefore the prediction can be clearly resolved with payouts made instantly. Problems arise when the market in question has an ambiguous outcome. Any possibility of ambiguity is catastrophic for a prediction market, and so strict rules must be in place to allow bets and payouts to flow freely.

The second limitation of a Bitcoin prediction market is the platform’s popularity. Fortunately in this instance, the problem is likely to be resolved in the years ahead as more money flows into prediction market platforms. As it currently stands, the volume of markets or the number of bets within each market are likely to be low. As a result, the various options to bet and the potential to earn are hindered. That said, we quite aptly predict that these platforms will have a huge surge in popularity, resulting in a dramatic increase in the number of markets and the prizepools at stake.

This article will be updated over the months and years to come as this industry evolves. What is currently a very nascent market is no doubt poised for enormous growth, and we expect Bitcoin prediction markets to flourish in the not too distant future.

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