New to PredictIt? Or just curious what it’s about? This short guide helps explain what it is, how it works, and how people make and lose money trading on politics.
Is this legal?
Yes. PredictIt has obtained a letter of No-Action from the CFTC allowing them to operate online trading markets on political outcomes (event futures) for academic purposes. PredictIt is officially a non-profit venture of Victoria University and is run and operated by Aristotle, Inc., a political data firm in D.C.
What about fees?
To pay for operating costs, PredictIt levies two fees on its users. First, it takes 10% of your profits. Second, it takes 5% of your withdrawals (ostensibly for defraying the costs associated therewith). How does this work out in practice?
Let’s say you use the referral link above and deposit $20, and are matched $20 by PredictIt. You then buy $40 worth of shares at 50c for Trump to win the 2020 election. That works out to 80 shares. For simplicity, let’s say you decide not to trade them at all, but just hold til the end. In one Universe, Trump wins and your $40 is now $80. PredictIt takes 10% of the $40 profit you made or $4, leaving you with $76. If you then withdraw that money they levy another 5% on the total amount withdrawn, meaning you walk away with $72.20. Of course, in another universe Trump loses and you lose everything – but you don’t pay any fees on losses. And in still more universes the price goes up and down and you buy and sell at different prices and so forth.
Okay I’m a little confused about how and what we’re actually “trading” here
PredictIt is kind of like a stock market but for political events. Each political event, like the outcome of an election, is either going to happen or not happen. In the PredictIt marketplace, traders exchange “shares” that the event will or won’t happen. Each share is priced somewhere between $0.01 and $0.99 apiece. If the event comes true, PredictIt rewards the holders of YES shares with $1 per share (less fees) and the holders of NO shares get nothing.
Because prices are between $0.01 and $0.99, the price effectively tells you the % chance that an event will happen. Let’s say you were betting on a coinflip – the market would eventually settle at a price of 50c a share for Heads YES and Heads NO. That’s because the true odds of a coinflip landing heads is 50% and we all know that. For elections and the rest of events, there’s dispute about whether the market’s price reflects true odds or not, and solving that puzzle is part of the fun of the site.
The site’s help section is useful here as well:
How do you make money doing this?
There are three basic ways to make money on PredictIt:
- Be good at predicting things. If you think something is more likely to happen that the market is pricing it and if you’re right, you will make a lot of money in the long run.
- Be good at reacting to the news. If you think a piece of news will move a market’s price up or down and you see it first, you can profit by buying and selling shares in anticipation of the market movement and after the market moves.
- In some markets, you can profit with purely “technical” strategies. For instance, in a high volume market, you may be able to simply buy a lot of shares at one price and sell them for 1c higher. If you’re selling 1000 shares apiece, this can work out to $50 a day. But most markets don’t get this kind of volume.
Are people successful doing this?
Yes. Most folks just play occasionally, for big elections. Some of us play year-round, making a steady income from weekly markets on tweets and polls. The very best players (a cohort of probably 10-20) make near or in excess of $100k per year from PredictIt. The second-tier (of which I’m a part) make a respectable $20-$80k from the site. Most people make far less of course – and in fact more money is lost on PredictIt than won (because it’s a negative sum game once fees are taken into account).
If you ever have any questions about how the site works or a particular market or whatever, feel free to reach out to me here, on twitter, or on the PredictIt comment boards.