The Basics of PredictIt

PredictIt is an event prediction market which allows individuals to bet on whether an event will or will not occur (e.g. whether there be an economic recession within a particular timeframe) and on the outcome of events (e.g. who will win an election).

For example, at the time of writing PredictIt is hosting a market entitled “Who will win the 2020 U.S. presidential election”. The screengrab below depicts the details of this market on November 23, 2020.

We’ll use this specific market and the prices in the above image to walk through how PredictIt’s markets work.

When an individual wants to place a bet on PredictIt, they do so by purchasing a particular contract.

For example, if you wanted to bet that Joe Biden would win the 2020 presidential election, you would buy the Yes contract for Biden. At the time of our screengrab, the best available price for one Yes Biden contract was 90 cents.

Alternatively, you could buy a No Trump contract at the offer price of 89 cents a contract.

On the other hand, if an individual wanted to bet that Trump would win they could purchase a Yes Trump contract at an offer price of 13 cents or a No Biden contract at 11 cents.

There are two potential ways to profit off of betting in PredictIt’s markets.

Hold to Settlement

The first is to correctly wager on the outcome of the election and hold the contract to settlement.

So, for example, assume an individual deposits $90 with PredictIt and, wanting to bet that Joe Biden will win the election, buys 100 Yes Biden contracts at 90 cents each (a total wager of $90).

Now assume that, after some time, PredictIt determines that Biden has won the election.

In this case, each Yes Biden contract and each No Trump contract will pay out $1. And all No Biden contracts and Yes Trump contracts will close at $0.

Therefore, the individual holding 100 Yes Biden shares will receive a payout of $100 for a before fees profit of $100-$90 = $10.

And all holders of No Biden and Yes Trump contracts would lose the money they wagered.

Sell Before Settlement

An alternative possibility is that the participants in this market recalibrate their assessment of the outcome prior to the settling of these contracts, prompting a change in their price.

For example, suppose that – for whatever reason – market actors now think a Biden victory is more likely.

Assume for example, that Trump announces before the electoral college even meets to settle the 2020 election his intent to run for the presidency again in 2024.

PredictIt participants may take this as an implicit concession of the 2020 election and interpret it to mean that Trump will no longer attempt to contest the validity of the 2020 election results in court or overturn the result through electoral college machinations (or will continue these efforts but is implicitly expressing that he does not believe they will be successful).

In this case, participants who previously expected a Trump win or were ambivalent about the outcome may move to buy Yes Biden contracts.

Their purchases of Yes Biden contracts – all else equal – would bid up the price of these contracts.

Let’s say the price of these contracts is bid up to 97 cents each.

In this case, our hypothetical holder of 100 Yes Biden contracts could sell his contracts, before the settlement of this market, for a before fee profit of $97 - $90 = $7.

Fees

PredictIt charges no fee at the point of purchasing a contract(s).

That is, our hypothetical trader would not pay a fee at the time of buying his 100 Yes Biden contracts.  

10% of Profits

However, PredictIt does charge a 10% of profit fee on profitable transactions.

Assume for example that PredictIt determines that Biden won the election and that our hypothetical trader held his 100 Yes Biden shares until settlement.

In this case, he would make a pre-fee profit of $100 - $90 = $10.

Now PredictIt will take a fee equivalent to 10% of the profit, which in this case is $1.

So this participant would have made an after profitable-transaction fee gain of $10 - $1 = $9.

In other words, his initial wager of $90 would now amount to a total of $99. 

5% of withdrawals

Additionally, Predict charges a 5% withdrawal fee.

So suppose our hypothetical participant wants to withdraw his $99 after his profitable transaction.

In this case, PredictIt would charge a withdrawal fee of $99 x .05 = $4.95.

Pre-Tax, After Fee Profit (assuming withdrawal after a single transaction)

So, after all of the associated fees, our hypothetical participant would have made a pre-tax profit of:

 $100 – $1 – $4.95 – $90 = $4.05

(amount at settlement) – (fee on profit) – (withdrawal fee) – (initial amount wagered) = $4.05

This amounts to a 4.5% pre-tax return on the transaction ($4.05/$90; pre-tax profit/amount wagered).

Market Size

Note that PredictIt’s markets are capped in a way that the financial markets are not.

No individual may wager more than $850 on a single contract type.

So, for example, our hypothetical participant wanting to bet on a Biden victory could buy, at most, $850 worth of Yes Biden contracts and $850 worth No Trump contracts for a total wager of $1,700.

Limits on the Number of Traders

PredictIt also sets limits on the number of traders for each contract type.

You will see, in the above screengrab of PredictIt’s rules for this market, that it added a note on October 19, 2020 – still roughly two weeks before election night – stating “As of this time, the contracts for Joe Biden and Donald Trump have reached the limit for the allowable number of traders”.

Written By: Aiden Singh Published: November 23, 2020