Inside Prediction Markets: What the Pros Know (and You Don’t)

About this video

• Video Title: Inside Prediction Markets: What the Pros Know (and You Don’t)
• Channel: Unabated
• Speakers: Jack (Host)
• Duration: 00:11:18

Overview

This video explains what prediction markets are, how they function, and their legal status, particularly in the context of sports betting. The host, Jack, a professional gambler of over 20 years, highlights how these markets differ from traditional sportsbooks, emphasizing the ability to trade out of positions and the concept of betting against counterparties based on probability. He also outlines three key risks for users to consider before participating: adverse selection when market making, competing with institutional market makers, and the impact of fees and commissions.

Key takeaways

• What are Prediction Markets? Platforms like Kelshi and Poly Market allow legal trading on the outcomes of events, including sporting events, across the US. They operate by allowing users to bet against each other on a probability scale from 0 to 100, with markets settling at $0 or $1.
• Legality and Regulation: The CFTC (Commodity Futures Trading Commission) regulates these markets, considering them "event contracts." While generally permitted, they cannot involve or relate to illegal activities. The CFTC has indicated it will not take action against licensed prediction markets offering trading on sporting event contracts, despite the debate around whether this constitutes gambling.
• Differences from Sportsbooks: Unlike traditional sportsbooks where you bet against the house, in prediction markets, you bet against a counterparty. You can either accept their offer or make your own. These markets also offer more limited betting options to comply with regulations and allow users to trade out of their positions at any time, unlike the cash-out offers from sportsbooks.
• Risk 1: Adverse Selection: When acting as a market maker, there's a risk that others with more information will only take your offer when it's favorable to them, or that your offer will be filled at an unfavorable price if market conditions shift significantly. It's generally safer for new users to be market takers.
• Risk 2: Institutional Market Makers: Prediction markets often employ institutional market makers with sophisticated algorithms to provide liquidity. New users may be competing against these entities, not just other recreational bettors.
• Risk 3: Fees and Commissions: Prediction market platforms make money through fees and commissions, which can significantly erode profits. These fees can be charged to winners, takers, or both. As the market becomes more competitive, fees are expected to decrease.