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In this piece, I:

1) Analyse the data that WSJ present on profitable Polymarket accounts
2) Look at comparable activities
2) Look at where the data is useful, and where it is not
4) Consider whether this is the correct way of analysing prediction markets

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A recent Wall Street Journal (WSJ) article titled ‘Why Almost Everyone Loses—Except a Few Sharks—on Prediction Markets’ found that just 0.1% accounts on Polymarket take home 67% of profits on the platform.

It’s a stat that punches you in the face when you read it.

That right hook is followed by this jab to the chin:

“Polymarket trading data indicates a typical user is down between $1 and $100, while the least successful 10% of Polymarket traders have lost an average of $4,000 each.” 

Polymarket is not alone.

On rival exchange Kalshi, for every 1 profitable trader, there are 2.9 unprofitable ones.

There’s no way of looking at this data and not feeling a knot in your stomach. Upon first glance, at least.

But when you interrogate this further, the harsh truth hits you: markets are extremely efficient.

They were not built for retail traders to win.

Buffett once said that "The stock market is a device for transferring money from the impatient to the patient"

If you were reconfiguring that for prediction markets, it would go something like:

“Prediction Markets are a device for transferring money from those who think they’re going to win, to those who know they’re going to win”

Data with no context is often useless, even with a big sample size such as the one that WSJ presents.

Getting ahead of the article, Kalshi decided to run their own analysis, to which their head of comms tweeted:

It was quoting this chart, posted by Lauren Chen, comparing PMs to Stock Day Trading, Options, Sportsbooks and Futures.

It shows that PM users are ‘less likely’ to lose money. The data cited isn’t perfect, and goes back decades, but it gives us at least an idea directionally that where a market is created, typically professionals win out.

Looking further afield, 10 years ago, outlets ran articles about daily fantasy sports (DFS) in the U.S that look eerily similar.

It showed that 1.3% of DFS players paid 40% of entry fees.

It also showed that 82% of users lost between $25 and $1100.

When looking at derivatives, in 2022, the FCA cited concerns about retail investors using CFDs (leveraged derivatives). They said that 80% of users are losing money. And the UK isn’t alone. Across Australia, the EU and Brazil - there’s a similar story.

Between 63%-97% of retail investors across derivative products such as CFDs, spread betting, and futures lose money.

If we continue comparisons - poker, a game of skill, still sees 62.5% of players lose money before rake.

The net rake can be anywhere from 3-10%, so those unprofitable players are even more unprofitable than this data shows. And some of those profitable players likely break even or are unprofitable.

Perhaps the best analogue of all, however, is Betfair Exchange.

The UK-based exchange has been operational since the early 2000s.

I once showed the exchange to a US-based VC when we were discussing prediction markets. They couldn’t believe that the novelty of prediction markets was something that the UK and Europe had access to for more than 20 years.

It’s difficult to decipher exactly how many people win or lose money on Betfair Exchange.

The exchange matched £80bn+ across 3bn bets in 2023.

They levy a high-profit Expert Fee that applies to a “small number” — less than 0.5% of customers.

To even be considered, an account must have made more than £25,000 in gross profit over the last 52 active weeks and bet in more than 100 Exchange markets.

That does not necessarily prove that only 0.5% of Betfair users are profitable, but it does show that the cohort making meaningful, repeat profits on a mature peer-to-peer betting exchange is tiny.

That sounds a lot like what we’re seeing on prediction markets, doesn’t it?

The trouble with derivative products is that the data doesn’t account for some of the numerous reasons that they exist.

One of these is hedging.

And whilst this is currently a very small proportion of trades on prediction markets, we can’t know for certain, because we don’t have a unified view of the positions a trader may have.

Some people are using prediction markets to lose on purpose.

If that doesn’t make sense, I’ll explain.

Let’s use three examples.

Hedging positions is something that traders do regularly. Institutional ones may use OTC desks. It’s difficult to truly understand the overall position of some of the 70% of Polymarket users. That’s not a ding at WSJ, because I think the article is broadly good. But it does just show that truly understanding the winners and losers in a market where some are losing on purpose is very difficult.

(1) Prediction Markets match up against derivatives across the world from a user loss perspective. There needs to be proper regulation, and there needs to be proper consumer care.

(2) Prediction Markets do a lot of things. Sports wagers, hedging, crypto prices and more. Isolating where retail users are losing would give you the best indicator of how consumer protection needs to work.

(3) Prediction Markets of the future will be much more focused and clear in their offering. Hedging, institutional uses, prediction accuracy of typically difficult to predict events, and such will be focal.

Disclaimers

This newsletter is for informational purposes only and is not financial, business or legal advice. These are the author's thoughts & opinions and do not represent the opinions of any other person, business, entity or sponsor. Any companies, platforms, markets or projects mentioned are for illustrative purposes unless specified.

The contents of this newsletter should not be used in any public or private domain without the express permission of the author.

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It's crucial to provide our readers with clear information regarding the inherent nature of services and products that might be covered in this newsletter, including those advertised by our sponsors from time to time. When you trade on prediction markets (including event contracts, opinion markets and other speculative instruments) your capital is at risk. Risks associated with prediction markets include price volatility, loss of capital (the value of your position could drop to zero), illiquidity, complexity, evolving regulation and lack of protection. Many prediction market operators do not currently operate in a fully regulated industry, and availability varies by jurisdiction. Therefore, please be aware that when you place funds on prediction markets, you may not be protected under financial compensation schemes and protections typically afforded to investors when dealing with regulated and authorised entities to operate as financial services firm. Nothing in this newsletter constitutes a recommendation to place, hold, or close any position on any market.