The Investor’s Guide to Polymarket

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Polymarket is a “prediction market,” which really means “gambling platform.”

Thrust to prominence due to the U.S. presidential election, you can bet real money (in the USDC stablecoin) on the outcome. You can also bet on practically anything, including the next James Bond actor, whether the US will confirm aliens exist, and whether bitcoin will hit $250,000.

Polymarket has become a societal phenomenon, quoted by mainstream media and tweeted by Elon Musk, who claimed it is more accurate than polls, since real money is on the line. Built on Polygon, it is one of the first bona fide mainstream crypto products.

In this guide, I’ll explain how it works, the difference between gambling and investing, and the real investing opportunities in Polymarket’s massive growth.

How Polymarket Works

It’s similar to sports betting, but easier to understand.

You buy “shares” of an outcome, each priced between $0 and $1. The price of a share reflects the crowd’s best guess on the probability of that outcome happening. If it happens, each share pays out $1. If not, it pays $0.

For example, let’s say there’s a bet on Polymarket on whether it will rain tomorrow:

· “Yes” shares are priced at $0.70 (the crowd believes there’s a 70% chance of rain)

· “No” shares are priced at $0.30

Let’s say you buy 10 “Yes” shares:

· Cost: 10 x $0.70 = $7.00 (You bet $7.00)

· If it rains: Payout is 10 x $1 = $10.00 (Profit: $3.00)

· If it doesn’t rain: Payout is $0 (Loss: $7.00)

Polymarket aggregates the beliefs of all the bettors, weighted by the amount they’re willing to bet. It’s also called “the wisdom of the crowds,” though this statement is misleading, because many bets on Polymarket can be manipulated by people with insider knowledge.

The Problem with Polymarket

Let’s say, for example, that an upcoming HBO documentary was going to finally reveal the identity of bitcoin creator Satoshi Nakamoto. A bet forms on Polymarket guessing who the famous person is going to be.

Think of the hundreds of people who have been involved in the making of that documentary, from the HBO executives to the lowly video editors. They know the answer. Any one of them can hop on Polymarket before the release date, place a bet, and win real money — at a very favorable payout.

For some bets (like the outcome of the election or this year’s Super Bowl winner), no one definitively knows which way it will swing. But for many bets on Polymarket (like whether Taylor and Travis will break up, or whether Lana Del Ray will get pregnant this year), some people know, and you don’t.

That’s why a bet on Polymarket is a sucker’s bet.

Gambling vs. Investing

Gambling is bad; investing is good.

Gambling promises something for nothing. The house always wins. And, for some unlucky gamblers, it can be highly addictive, robbing them of everything. In the end, no value is created (unless you want to claim “entertainment value,” but it’s only entertaining when you win).

Investing is good, because it puts our money behind important companies that provide products and services that society needs. It lets us pool resources into building things the world wants. In the end, massive value is created.

I would never recommend placing a bet on Polymarket: let the suckers do that. Nor would I invest directly in Polymarket — any more than I would invest in a casino. To me, society would be better off if gambling was banned completely.

Everyone is talking about Polymarket, though, and no one mentions it’s built on blockchain technology. CNN and Fox News talk about it constantly, but no one cares it’s crypto! This is a milestone moment. We have finally arrived.

Which means there are intelligent investing opportunities in Polymarket, behind the scenes.

The Investing Opportunities

Polymarket is built on Polygon (POL), one of the most popular layer-2s for Ethereum (ETH). This means Polymarket’s smart contracts — the millions of rapid-fire bets being made around the world — are faster and cheaper than running on Ethereum directly.

There’s no Polymarket token at this point (that token launch would be bananas), but investors can simply buy and hold POL, the platform Polygon is built upon (and named after). Better yet, you can buy and hold ETH, the foundational platform underneath Polygon and Polymarket.

The engineering behind Polymarket is kind of amazing. You link a crypto wallet to Polymarket, then deposit USDC into the Polymarket wallet. When you buy shares, you’re really buying corresponding ERC-20 tokens that are minted or burned as needed, when trades execute.

Put another way, each bet has its own set of outcome tokens, minted as NFTs, and collateralized by USDC. If you’re betting on the highest-grossing movie this year, you’re getting an NFT representing “Inside Out 2,” “Deadpool 3,” etc. — and the NFT can either be redeemed for winnings, it or goes to zero.

But who determines the winner? Anyone can propose an outcome by staking a bond of $750. For the next two hours, other users can dispute the proposed resolution. If no dispute is raised, the proposer gets a reward of $5, bets are paid out, and the market is settled.

What if you disagree with the outcome? Some outcomes are not clear, so any other user can dispute the proposed outcome by staking another $750 bond. From here, it goes to a human vote using the Universal Market Access (UMA) protocol, which is like an independent jury of UMA token holders, separate from Polymarket.

From here, the winning proposer gets back their original $750 bond, plus $250 taken from the disputer’s bond. This system is designed to reduce “sore loser” disputes: if you’re wrong, you’ll lose even more money by disputing the outcome.

I’m greatly simplifying the technology behind this system, but it’s pretty incredible: a fully-automated global market where you can bet on anything, run on blockchain-based smart contracts. We’ve finally got a mainstream blockchain product.

Even if it is gambling.

Prediction Markets Can Be Useful

As much as I would never recommend anyone gamble on Polymarket, I will admit it is useful as an information tool.

Musk is right: Polymarket is more useful than polling, because people are putting up their own money behind an outcome. That’s way more valuable than a pollster asking a rando over the phone who they’ll vote for in November.

But remember that probability is not certainty.

If the presidential election market is 51% for one candidate and 49% for the other, that means it’s basically a coin toss. Similarly, if the odds on TikTok being banned are 96% that it won’t happen, that still leaves a 4% chance that it will be banned.

Sometimes the unlikely event happens!

This is why betting on Polymarket is essentially gambling, and why it’s better to stay away. Look at it instead as one source of information, from people who are willing to bet on their opinions (or insider knowledge).

Investor Takeaway

Even if you don’t want to invest in a Las Vegas casino, you can always invest in Las Vegas.

Maybe you invest in Allegiant Stadium, or the Las Vegas Raiders, since all those gamblers will watch football. Maybe you invest in Las Vegas real estate, since the gambling industry will attract a lot of homebuyers and retail shops.

With Polymarket, there’s no way to invest directly — but you can invest indirectly, by buying and holding Polygon (POL) or Ethereum (ETH). Because some of the value of each Polymarket bet flows through both POL and ETH, whenever you hear Polymarket mentioned on TV, you can say, “I own a piece of that.”

In gambling, the house always wins. Own a little piece of the house.

Disclaimers: I am not a financial advisor, just a 10+ year crypto investor who’s written two books and several hundred columns on crypto assets. All investing involves some risk; see our investing approach for how we manage risk through diversification. Never invest more than you’re willing to lose, and see losses as learning.