Prediction Markets- How Can They Affect Us?

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Every time you enter a contract where you have to buy something in the future, you are entering a ‘futures contract.’ Where you agree to sell an item in the future because you think it will be more valuable, that’s a prediction market. Lately, prediction markets have been on the rise in both stocks and cryptocurrencies, and different investors have had divergent opinions.

How Prediction Markets work

In the stocks and commodities industry and even with Bitcoin as well, prediction markets are standardized. Each prediction contract made is specific to all the parameters involved. In a typical prediction market, the contract must specify the following:

  • The unit being traded
  • How the settlement will be made
  • The currency to be used
  • The quality of items being traded and the amount being traded

In the cryptocurrency sector, futures have been changing the way investors approach the cryptocurrency. Prediction markets allow investors to predict Bitcoin’s prices without even owning it. While this may be good news for traders who want to avoid the hassles involved with owning the cryptocurrency, it lowers Bitcoin’s liquidity.

Cryptocurrencies naturally increase in value as their demand goes up. However, if investors are able to invest in a coin without ‘physically’ owning it, this means that Bitcoin is actually not having increased adoption.

Do Prediction Markets Affect Cryptocurrencies Negatively?

Bitcoin prediction markets became popular late in 2017 after the Chicago Board Options Exchange (CBOE) introduced the concept on their exchange. One day after the announcement, Bitcoin’s price surged by 10%.

Within two weeks, top cryptocurrency exchanges like GDAX, Kraken, HitBTC, and Bitstamp also introduced prediction markets, driving Bitcoin’s value upwards to hit an all-time high of $19,000. When the futures contracts matured, something expected happened: Bitcoin’s value dropped by 72% within the first two weeks of January 2018, settling at $6,000.

Today, Bitcoin’s price is valued at the same range it was prior to the introduction of futures, $7,700. The introduction of prediction markets may have driven Bitcoin’s value upwards, but the price later underwent a market correction.

Although prediction markets affected Bitcoin’s price and a correction later happened, forces other than futures seems to have more impact on the price of Bitcoin. Read this article to learn more about prediction markets in the cryptocurrency industry.

Effects of Prediction Markets in General

Short-term Rise in Value

One of the most consistent changes noticed after the introduction of prediction markets in any industry is that the value of commodities involved increase suddenly. When gold futures were introduced in 1974, the price surged from less than $300 for a kilo of gold to $400 in just three months. Three months later, gold’s value went down again, probably because people dumped the asset.

In nearly all markets, the introduction of futures almost always leads to more demand for the commodity. However, after investors sell their futures contracts, a market correction occurs.

Demand for Commodities

Prediction markets may be a specialty of the experienced investor, but they always tend to drive demand for commodities to a great extent. Investors love to make predictions, and if they are certain they could make money out of it, they will purchase the commodity involved.

Bitcoin, for example, was valued at just above $7,400 when rumors emerged that the Chicago Board Exchange would introduce Bitcoin futures. Within a week of the rumors, Bitcoin’s value had risen to more than $10,000. Many institutional investors, who previously have always been wary of cryptocurrencies, quickly adopted the cryptocurrency.

High Volatility

With extremely high demand for any product comes a market correction. This has occurred and reoccurred in different stock markets, commodities and with Bitcoin as well. Last year, when Bitcoin moved from just $7000 to $19000 in one month, its price suddenly moved down to $6000 in the next 30 days.

If today a cryptocurrency exchange announces that they will offer prediction markets for a less popular coin like Zcash, its demand will suddenly increase. However, once they buy contracts and they mature, the coin’s value is likely to go back once again, leading to huge profits or losses to those on the wrong side of prediction markets.

Greater Convenience for Investors

Prediction markets are a breath of fresh air for many investors. For one, futures are conducted in the most convenient manner for investors. If the markets are made for commodities like gold, investors only need to sign contracts using their cash. They don’t have to own physical gold to enter futures contracts.

With more investors feeling confident about trading, demand for the commodities definitely increase. In the long term, prediction markets tend to improve the liquidity of commodities and assets. However, as studies have often shown, they don’t have a great impact on any industry on their own. Traditional forces of demand and supply have the biggest impact on the prices of commodities and digital assets.

Disrupting Industries

Like most financial instruments, prediction markets keep on evolving. In sports and casino gambling, it’s now possible to make predictions of live events so that your contract matures within minutes or hours. For example, you can bet the outcome of a basketball game while it happens.

In the blockchain industry, prediction markets are evolving by eliminating the intermediary companies. Instead of making predictions on a website, different investors can predict the outcome of games, events or market prices directly on a blockchain platform. Their funds are held by smart contracts, and winners get their rewards automatically after the outcome of the event is determined.

Information Gathering

One of the most underrated impacts of prediction markets is their ability to influence people’s decisions. If a market asks people to bet against the outcome of a football game and 70% of the investors predict team A will win, other investors are likely to place the same bet.

If 80% of investors make a prediction that certain crypto will drop in value, a lot of investors are likely to short sell the same coin because of the influence of prediction markets. On a broader scale, prediction markets have always been used as the benchmark of making financial decisions by lots of companies, governments, and investors.

In Conclusion

Prediction markets, like any financial instruments, may have an impact on trading markets from time to time. However, on their own, these markets don’t have such a huge impact as to affect the long-term price movements of stocks, assets or commodities.

 

This blog post was written by our guest, Ronny Martelli from Exposureland.com

What will be left of Bitcoin when the hype ends

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There is a great deal of real value in some cryptocurrency technology

There are a number of overlapping technologies involved in understanding cryptocurrencies. Currency itself is a concept which people deal with every day but may not have considered more deeply than the level required to transact a purchase. Behind cryptocurrencies lie blockchains, a second level of detail. There are now cryptocurrency phones, which connect to standard phone networks using standard data plans and can help you conduct your next generation currency trading from wherever you happen to be. These things are all happening at the same time as other technological marvels – from The Internet Of Things, to 5G, Artificial Intelligence (AI) and beyond. It can hardly be a surprise when people turn off from considering these things, given the overlapping complexity they present.

Few doubt that much of the talk in the media and industry is based on hype around these new technologies. The question is, where does the real value begin. And sitting underneath Bitcoin and its competitors (the 1500 or so direct alternative cryptocurrencies that Bitcoin has.)

The real value when Bitcoin is done is in Blockchains

A Blockchain is simply a distributed ledger  a list of who owns what asset, which is stored in multiple places – on multiple computers – at once. The distributed nature of the chain is what give them their value. At a principal level, Blockchains serve many of the purposes that banks currently do, they provided a medium both ends of a transaction can trust to act fairly. They also neatly sidestep many of the problematic aspects of banking, however. They can perform a host of useful functions beyond recording who owns what Bitcoin. They are hard to hack, for example – because hacking them would require multiple parallel successful attacks (on every blockchain miner in the system at once.)

Blockchains can have intelligence and decision making built in to them, in a way that current asset ledgers do not. Since they are computer and therefore algorithmically based, ‘IF / THEN’ statements can be built in to them – so called ‘smart contracts’. For example, once a Blockchain received a reliable notification that ‘money has been paid’ and ‘identity is confirmed’, they could transact legal ownership of an asset such as a house. This sort of facility cuts out a collection of middlemen, within the housing chain, and provides transparently reasonable terms, which cannot be interfered with and with which everyone involved can agree, before the process starts.

Blockchains then are more useful than cryptocurrencies and are likely to be around long after Bitcoin has been relegated to the bubbles of history. Cryptocurrencies require a Blockchain to survive, but a Blockchain does not require a cryptocurrency to function.

Where could I invest in Blockchains?

Ripple is the most successful Blockchain company in the world at the moment. The publicly traded company has seen its share price grow even more than Bitcoin’s value, following successful trials of their technology. It’s not hard to imagine Ripple, or another Blockchain product being used to store and provide reliable proof of some of the most valuable and currently difficult to manage aspects of our lives.

A Ripple Blockchain could be used, for example, to provide proof of identity with a digital passport, digital birth certificates or digital driving license. Other assets, like car ownership, could also be stored in a Blockchain making them easier to transact and cheaper to administer. Governments will be particularly interested in lowering the cost of overseeing these key life documents.

Blockchains are not, however, a panacea. As they stand have one major drawback – the enormous amount of energy and reasonable amount of time required to transact something through them. Solutions are being worked on.

Bringing it all together

Even Warren Buffet has called Bitcoin ‘Rat poison squared’. Buffet is one of the world’s smartest and most consistently successful investors but he is saying something which is common sense. Cryptocurrencies essentially amount to private companies printing the sovereign currencies of the countries of the world. When Bitcoin sells $3bn of cryptocurrency, they are effectively adding that amount to the money supply. Bitcoins are also much harder to tax than existing currencies. Governments simply will not allow private companies to produce currencies which undermine their ability to usefully influence the

Given the huge profits made by many of the world’s banks, regulators in key countries are closely watching Blockchains to offer some long needed innovation in the field. Long after Bitcoin has crashed, Blockchains will be around and providing real, measurable value, to the economy and us.

 

This guest post was written by Ralf Llanasas from What Phone.

Cryptocurrencies and the True Source of Value

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One of the arguments against Bitcoin and cryptocurrencies in general is that they do not represent true value. Behind the crypto-algorithms, according to this line of argument, is really nothing that could objectively be considered currency; indeed, nothing at all. Hence, cryptocurrencies are a bubble which is bound to burst. This is not just an any-man-on-the-street opinion; it has been espoused by the billionaire investor Howard Marks, who predicted the “dotcom bubble” of the 1990s. “In my view, digital currencies are nothing but an unfounded fad (or perhaps even a pyramid scheme), based on a willingness to ascribe value to something that has little or none beyond what people will pay for it,” Marks said in 2017. Marks used historical precedent to underscore this point, pointing to the notorious “tulip mania” that started in the Netherlands in the 17th century. In 1637, at the height of the mania, a single tulip bulb could be worth up to ten times the annual income of a skilled craftsman.

Lydian coin. Inscription reads “I am the sign of Phanes”. Electrum (alloy of gold and silver), length: 2,3 cm. Late 7th century BCE, found at Ephesus. Israel Museum, Jerusalem.

One might wish to consider other historical precedents, however. Currencies per se are a surprisingly recent invention in human history. According to the archaeological record, the first coins were used in Lydia (present day Turkey) in the 7th century BCE (see image above). This is long after the rise of cities and kingdoms and indeed the successful smelting of metals, including gold, silver and bronze; even 500 years after the commencement of the Iron Age in the Middle East. We also know that this was not due to lack of technical engraving ability, since many small metal seals with intricate designs have been found dating from many centuries prior to the 7th century Lydian coins (see image below).

Seal of Tarkummuwa, King of Mera. Silver (diameter: 4.2 cm). c. 1400 BCE, found at Smyrna. Walters Art Gallery, Baltimore.

The anthropologist David Graeber has provided an interesting explanation of why coinage was eventually developed. Coins were not initially used by most ordinary people, he argues. The available archaeological evidence shows that the first coins were used by soldiers. This makes sense, Graeber argues, when we consider that ancient rulers had to find a reliable way of feeding armies at the frontier of their empires. If the soldiers were stationed inland, he points out, it would be extremely difficult to move large amounts of grain or other foodstuffs with them. If, however, standardised coins could be minted and given to soldiers, the soldiers would be able to buy the necessary food from the ruler’s civilian subjects in these far-flung parts of the empire. By taxing his subjects, these metallic tokens of value would then be returned to the king. They began as a more efficient way of feeding armies, but once they acquired universally recognised value within the state, could be applied to any economic transaction.

In order to be hard to forge, coins had to be minted out of rare metals by skilled craftsmen. But even gold, silver and copper, which were used for the earliest coins, have no intrinsic value, as Israeli historian Yuval Noah Harari points out – “you can’t eat it, or fashion tools or weapons out of it.” The lesson here is that no form of currency has value above and beyond what we ascribe to it, collectively, as human beings. Thus, it will not do to dismiss a cryptocurrency, as Marks does, because it has no value beyond what people will pay for it (this is not to say, of course, that other arguments against cryptocurrencies fail; only that this particular line of argument is unconvincing). One might well imagine an ancient Lydian exclaiming, “These bits of metal with their fancy designs and inscriptions have no real value. The whole fraud will surely collapse after the king dies.” And yet, as we now know, it did not turn out that way. The coins had value because enough people came to believe that they did and that was all that mattered.

We have since, although only relatively recently in 1971, abandoned the gold standard, making way for the the US dollar as the world’s reserve currency. One could even argue, as some have, that the dollar is a less reliable store of value than either gold or Bitcoin, because the US Federal Reserve can simply print as many units as it sees fit – and indeed, in the last round of quantitative easing since the 2008 crash, it has been printing an unprecedented number. The amount of gold in the world runs up against physical limitations, whereas the amount of Bitcoin runs up against mathematical ones. While it is true that other cryptocurrencies can avoid the same limitations that appear to be built into Bitcoin, matters such as the total number of units to be issued and the value of each unit relative to everything else still depend on the vital criterion of consensus by the community of users. Notice that the technological aspects aside, this criterion also applied to the very first currencies used by our species. While it is true that the first coins were issued by rulers in a top-down fashion, these rulers did not realise that they had brought into being a monetary system that would soon escape their control. As Graeber also notes, after appearing in Lydia, coinage soon emerged independently in differently parts of the world. This meant that when different empires came into contact with each other, they had to arrive at a fair exchange rate. If the empires were of roughly equal power, this could not be determined by either of their rulers and was determined instead by market factors beyond any one individual’s control. Exchange rates between different official currencies have thus continued to fluctuate from ancient until modern times.

Bitcoin and other cryptocurrencies could indeed be seen as the next logical step: prior to their emergence, the only “non-physical” medium of exchange resembling a truly global currency was the IMF’s “Special Drawing Rights” or SDRs, although as their name suggests these have only been issued and used in exceptional circumstances. Better yet, unlike SDRs, cryptocurrencies are not controlled centrally in any way. Instead, they are designed to bypass both governments and banks. All they require is a public ledger, the blockchain, to keep track of all transactional information. Governments and banks understandably find this frustrating and will likely do all they can to bring cryptocurrencies under their control. In this respect, however, they may resemble a Lydian king who tries to fix the prices of various commodities, only to find his attempts frustrated by his subjects, who find roundabout ways to buy or sell commodities at market prices.

The fact of the matter is that we are now all living in a global economy, and cryptocurrencies have beaten the IMF to the finish line of establishing imaginary units of value that are created (or “mined”), recognised and used globally. One or even all of them may collapse eventually, but the point is that such an event cannot be brought about by governments or banks. The technology is now out there, as is the will to avoid the fiats of governments or banks. And if they do collapse irreversibly, that is not necessarily good news for fiat currencies. The need for an independent global currency will likely persist even in their absence, perhaps leading to a return to something like the gold standard. In any event, when we go back to the very root of currencies and what makes them valuable, we may well discover a counter-intuitive (at least, to some) truth: that both gold and cryptocurrencies are better placed as stores of value than fiat currencies, such as the pound, dollar or euro.

BailBloc: A Lesson in Cryptocurrencies’ Constraints?

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Charity is not the most obvious use of cryptocurrencies. In fact, it might be fair to say that most anecdotes involving blockchain-derived monetary systems are about conmen and almost criminally gullible suckers. Between ridiculous Initial Coin Offerings, with proposals as wild as reshaping the dental sector, the association with petty criminals and the far-right, and simple, old-fashioned fraud and theft, the innovation which was meant to reshape how we did business has had a rough time.

But with BailBloc, a brainchild of the New Inquiry (a New York based cultural magazine), that looked set to change. The initiative, in tandem with the Bronx Freedom Fund, promised users that slacktivism powered by blockchain could really have an impact on the world. By running the application on your computer, you could effectively take part in bitcoin ‘mining’, solving complex equations to earn Monero. This money is then ploughed into the Bronx Freedom Fund, and used to support those who cannot pay for their bail.

As a number of commentators have pointed out – perhaps most notably arch crypto-sceptic David Gerard  – it’s a far more circuitous route than it first looks. The amount of electricity poured into cryptocurrencies has risen over time as the calculations have grown increasingly complex: each ‘block’ you mine makes the subsequent one worse value for power. Not only is this massively detrimental to an environment already reeling under the blows of Trump’s EPA and worsening pollution elsewhere in the world: it also means that the amount of money donated will fall over time. Gerard makes the colourful analogy that it’s essentially burning $5 of coal, then sending $4 to the Bronx Freedom Fund. He also makes the valid point that Monero is a favoured target of particularly nefarious users of cryptocurrencies, because it is a especially hard to trace. As a result, BailBloc users will find themselves competing with automated accounts and botnets, which can muster up far more power.

It’s unfair to call BailBloc naive, because in many ways it recognised how the magic of cryptocurrencies – printing money from thin air! – can motivate users. In a very real sense, the project grasped the amount of processing power on hand around the world; it’s a lot easier to get people to give that up than to follow traditional donation models. The New Yorker‘s decision to class it as art does feel patronising, ignoring its fundamental genius: BailBloc runs on the principle that people (even its creators) don’t really understand how computers, or the internet, or cryptocurrencies really work.

In spite of the radical libertarian ethos which underpins them, blockchain-based currencies are increasingly the game of criminals (who have access to large scale botnets), or miners who can afford massive server farms. In short, those looking to use them for social causes are inevitably likely to be outgunned. In fact, those who are looking to use them for personal gain are also likely to be outgunned. The quest for grand decentralisation simply puts the power to mine new money into the hands of a different set of elites.