Predicated markets under prejudice

Original title:What's most People Get Strong About Prevention Markets

Photo by Jeff Park, Bitwise

This post is part of our special coverage Syria Protests 2011

 

Last week, two media outlets, Axios and MorePerfectUS (MPU), turned to the prognosis market. Dan Primack of Axios attempts to create neutral dialogue spaces for the founders of the Kalshi platform, even though his own position is not difficult to discern, while Trevor Hayes of another media has a clear and ambivalent position that perceives the market as a type of social hazard。

Frankly, I agree in part with both sides. As I travel through Wall Street and the encryption industry, I understand very well the growing public anxiety about over-financialization, a trend that has led to a culture of gambling perceived as a public health crisis. However, these journalists are generally caught in the wrong spot: they are quick to conclude that they are looking backwards for those who started them, and to confuse the issues of insider trading, online casinos, gambling addictions, etc. with an oversimplistic one-sided narrative。

But it is precisely the public’s biggest misperception of predicting markets: for the time being, regardless of all kinds of excessive financial malfeasance caused by end-date rights, swaps, ETFs, and Meme stocks, predicting markets themselves should be accepted, giving individuals a high degree of autonomy to choose, discovering the truth, and their decentrization properties themselves are of legitimate value。

I will take this issue to the bottom。

THE BLURRED BOUNDARY BETWEEN INVESTMENT AND GAMBLING DEPENDS ONLY ON WHETHER THE STRATEGY OF THE PARTICIPANTS HAS THE RIGHT EXPECTED RETURNS (+EV), AND WHETHER THE MARKET ITSELF IS A MECHANISM OF CERTAINTY OR RANDOMITY. IN OTHER WORDS, IT IS HUMAN BEINGS THAT DEFINE BOTH, NOT THE GAME ITSELF。

Let's do this in detail. I note that, in the MPU report, Trevor Hayes' statement often begins with a presupposition: "When it is clear that the market is gambling...", as if it were an established fact that need not be argued. And it is this underlying assumption that needs to be revisited。

The most significant trend in the financial sector over the past two decades has been the widening of the gap between investment and gambling. This is evidenced by:

• 60% of U.S. stock transactions come from high frequency transactions and the area is oligopolized by Jane Street and Citadel
• PASSIVE ETFS ACCOUNT FOR MORE THAN 90% OF THE TOTAL ASSET MANAGEMENT OF ETF (THE ACTIVE INVESTMENT STRATEGY IS ONLY NOW RISING SLOWLY)
• The average United States stock holding cycle has been reduced from nine years in the mid-1970s to about six months in 2025。

At the same time, the average daily United States stock trade has more than tripled over the past decade, and the driving force remains the algorithmic trade. In addition to this, there is an irreversible trend: in 2025, the size of the bulk trade exceeded $5 trillion, an increase of about 50 per cent compared to 2023。

But few financial commentators accuse the stock exchange itself of gambling. What is the reason? There is a general public default that equity investment is not a gamble, because people think it needs professional competence. This is crucial: skills games and pure probabilities are unfairly classified as gambling in general. Tiger machines and poker, for example, are known as gambling, but they differ from one another: tiger machines are a game of pure luck and short of expectations; and poker, relying on technical strategies, can well achieve the desired returns。

To put it bluntly, the criteria for classifying investment and gambling depend only on whether the strategy achieves positive returns, and not on the game itself -- whether the game is a pattern of fixed results such as sexual arbitrage, tiger machines, or random fluctuations such as stock selection, poker。

The forecast market is similar to poker, which is a random game with certainty logic. Whether it is an investment or a gamble is entirely up to the participants themselves: it depends on whether you are a person of high autonomy, a person of high professional competence, a person of low autonomy, a person of low awareness, or in between. The second question arises: if gambling is understood to be people-led speculation, how does such markets work and where does liquidity come from

The other side of speculation is risk hedge (insurance)。

All financial innovations are considered gambling at the beginning of life. The early days of the stock market were characterized by a proliferation of insider trading, with the European dollar in the futures market becoming even a tool for politicians to conduct insider trading, and today’s large commodity deals are difficult to define by traditional definition – all the same. The root cause is that speculation and hedge are two sides of the same coin. It is a zero-sum game, with the core being the transfer of completed risks; and not all information is naturally born to private actors。

This leads to criticisms of the markets that are most frequently projected: some markets are merely speculative and cannot create value for society and should not exist. Their most common example is sport. In the inherent perception of the general public, sports are entertainment and bets on it have no social value。

But it is wrong in itself. Recreation itself is a social consumption of human beings, and it can even be said that recreation is one of the core sources of human well-being. More critically, entertainment itself is an economic activity with bilateral market attributes. The global sports industry earns more than $50 billion a year and, combined with the surrounding industrial chains of the media, equipment, clothing, sports nutrition and so forth, the overall scale is projected to be over $1 trillion. In the case of Nike, for example, the huge amount of funding invested in support of teams and athletes itself requires capital allocation and hedge risks based on the outcome of the competition, the performance of athletes. Just because the United States does not open official compliance markets, the public has equated sport with casinos, completely ignoring its potential financial value。

The core value of derivatives is the realization of risk transfer. This is the bottom logic of securitization of all insurance products and assets. In order to achieve a risk hedge, there must be speculative involvement at the other end of the market; there is no substitute for this structure in open and transparent markets without administrative intervention. In fact, most of the problems with the insurance system resulted from government intervention that distorted real market pricing. Insurance and securitization are also among the greatest financial innovations in human history to improve capital efficiency。

But it remains a central issue: how to define whether a matter is a social hazard or a financial service of practical value? How should an incident classification system be established? This concludes with the core arguments。

The forecast market differs from other derivatives in two core qualities: precision, and limited maturity。

We go back to doing the basics of the market. General financial markets rely on centrally limited order books to provide liquidity and bottom assets have lasting value. But the market is forecasted to be quite different: once the fallout from the corresponding events has come to an end, market liquidity will go to zero and both buyers and sellers will leave the room. The binary 0/1 payment results completely invalidate the conventional dynamic hedge strategy and pose a great challenge to professional business。

More importantly, the market is forecasted to be a rate market, not a price market. This means that 50 percent of the small fluctuations within the probability range, the liquidity is much higher than 98 percent of the extreme probability range -- and the cost of payment for each point of change in the probability rate rises exponentially. So liquidity cannot simply depend on price differentials for continuous supply, and it is well known by the collectors of derivatives (e.g., 10 basis points fluctuated at the base rate of 4 per cent, and 10 basis points fluctuated at 0.5 per cent, with different meanings)。

In sum, in the event markets where information is extremely poor and participants have absolute information advantages, professional traders rarely enter to provide liquidity. This also means that, in the majority of the scenes, there is a very limited room for profit from the critics' ideas of "inners reaping from information advantage." The market itself automatically screens out events of genuine public interest。

For example, I know very well that my next podcast will wear Bitwise's brand, but the corresponding forecast market will hardly generate any liquidity. One of the major concerns of the public against insider trading is that insider people make huge profits, which is not the case: Inherent in the absence of liquidity in cold-blooded events, market liquidity itself has already been priced for the value of information. A rational event classification system is naturally formed as a result。

So where is the value of the forecast market sufficient to cover its potential risks

The precision mentioned above is its most precious quality. At a time when global finance is being held hostage by excessive financialization, asset prices are more affected by financial flows, technological trends and departure from fundamentals and the reality itself; and markets are projected to be a few tools that can allow prices to be anchored directly and excess interference removed。

In the future, if you have a fundamental judgement that Tesla's fare is too high, rather than directly buying and selling Tesla's shares (which are also subject to unconnected factors such as macro, large capitalization, financial, etc.), you can bet on the forecast market; if you want to prejudge non-farm employment data, you do not need to deal in European dollar futures, stock forwards, and be directly involved in the corresponding forecast market. Such precision would really reward in-depth research, professional judgement and real information advantages。

A large number of outside critics argue that it is a social hazard to predict the general loss of participants in markets to reap the weak financial awareness. The opposite is true: markets are expected to have the most equitable mechanisms to reward professional investors with information advantages. And it doesn't have a platform to pump water, which is completely different from the Vegas Casino -- casinos can drive off positive-profit players who continue to make a profit, and markets are projected to be open to all those with information advantages。

Citadel securities and CSW have announced the layout of forecast market operations. Are these giants harvesting vulnerable people? Apparently not. They understand more thoroughly than the general public: speculation and hedge are mutually reinforcing, and one side's risk exposure is the other side's revenue space。

Why is the press afraid of the truth market

(Note: Mrs. Gray Lady Grey, referring to The New York Times. The earlier editions of The New York Times, which were dominated by grey paper, black and white layouts, and very few colours, were dark, and, together with a strict and conservative etiquette, well-worded and well-established authoritative media, were known by readers and industry as Gray Lady. This means old-fashioned authority, American mainstream opinion poles, American elites, and traditional media that have a say in public opinion

Read here, you should understand that, with reasonable regulation, there is great potential to predict markets. So long as the returns are greater than the risks, gambling addiction, negative social effects, etc. can be addressed. But we also have a key question left: is there any unfairness in private monopolies that could result from insider trading related to major public events

The question is very complex, and I will write a detailed answer in a separate paper. Here I would like to share a thought and a book that I have recently read, Ashley Lindsberg, The Condonation of the New York Times。

The book is a compilation of the decades of systemic failures of this authoritative media, and it is not an accidental mistake: concealing the Stalin famine, glorification of Castro's rise, building up rumours about Iraq's weapons of mass destruction, diluting the risk of the Nazi rise. The New York Times has been reliant on information channels, ideology and institutional self-protection needs to distort the dissemination of truth。

By reading the book, it is clear that media bias is not simply a struggle for positions, but rather a deeper structural problem: the top authorities take the initiative to create a social consensus and then clean up their own reporting failures。

In the first place: Axios and MorePerfectus are not industry neutral. This is also why more and more media will be critical of the market in the future. But you have to be clear: the reason why they exclude predictive markets is precisely why you should support it。

The information would have been priced, which need not be disputed. I have always believed that the opposite of false information is never the absolute truth and that the opposite of false information is under official control。

The real debate was never about pricing information per se, but who had the right to define information, who could profit from it and whether it had been used in a monopoly before it became known to the public。

When insiders accumulate asymmetrical information, the profit is secondary and more central to power games. Reliance on the information disadvantage of the general public, information is used to manipulate public opinion and create false narratives, and the entire system of truth dissemination is monopolized。

The core of the opposition to insider trading is thus never about economic efficiency, but equality of access to information: Some rely on exclusive information transactions, while ordinary people have access only to information that is screened and allowed to be disseminated。

When you understand this layer, you will not be pessimistic about predicting markets, but rather one that looks at the world from a more precise and rational perspective. That is why I have always been convinced that a good look at the market is itself a very democratic concept。