Prediction markets are common among traders, whether you are trading the traditional stock markets or digital assets. They are short financial contracts with defined risks and rewards. Hundreds of traders using this form of trading get fixed monetary rewards once a trade goes their way or nothing when the trade goes the opposite way hence sometimes referred to as all or nothing. It is important to note that prediction markets involve high risks, and it requires in-depth knowledge of trading before exposing your hard-earned money to risks.
Blockchain Prediction Market is a form of trading in which you predict if the price of cryptocurrencies will rise or fall in a certain amount of time, but instead of the traditional system where bets are placed on a centralized exchange, the bets are placed on a blockchain and can be monitored by all participants. If you’re correct, you earn the option’s payoff; if you’re incorrect, you lose your investment. Each prediction has a specific expiration date at which the option is checked to see if it’s “In the money” (you were correct) or “Out of the money” (you were incorrect). Each also has a specific payoff that you can win. They are called “Prediction Markets” because the outcome is either win or lose; there’s nothing in between.
Let’s dig deep to help you get hold of this form of trading.
A contract gives parties the option to profit or lose their funds based on whether the options expire on the predicted prices. Profits are earned when the price is on the right side of a trading potion. You can now guess what happens when the price is against your trade.
Trading in these contracts is automatic, meaning that profits and losses are automatically credited or deducted from your trading account once the options expire. Once a buy position is placed, they should expect a payout or loss for the entire trading position. On the other hand, the seller is to make the full payout or retain the buyer’s premium. All profits and losses are added to the trader’s account on the contract’s expiry date.
There are two types of prediction markets; the asset-or-nothing and the cash-or-nothing. The cash-or-nothing option pays fixed amounts of cash when the contract expires above or below the predicted price. Payouts are in the value of the underlying security regarding the asset or nothing.
The asset-or-nothing options are also known as digital options, fixed returns options, or all-or-nothing options, and they are sometimes used for theoretical asset pricing. It is important to note that these options are prone to fraud; hence, they are illegal in most jurisdictions worldwide.
Prediction market traders can make money by correctly predicting whether a market will be above a specific price at a specific time. You either make a predefined profit or lose the money you paid to open the trade at expiration. Markets are priced between $0 and $100. Each contract will show you the maximum you could gain and the maximum you could lose. If your trade is successful, you receive a $100 payout, so your profit will be $100 minus the money you paid to open the trade. If your trade isn’t successful, you don’t receive a payout. This means you lost your capital but nothing else because your risk is capped.
Prediction market traders can make money by accurately predicting whether the market will be above or below a certain price at any given time. At expiration, you’re either making a predefined profit or losing the money you used to open the trade. You can trade from $0 to $100. Each contract shows you the maximum amount you can win and the maximum amount you can lose. If the trade is successful, you will receive a payout. If the trade is unsuccessful, you will not be able to receive payment and lose the money used to place the trade. This means that you have lost capital, but you have no choice because your risk is limited.
How do Prediction Markets Work?
Three key elements make up the prediction market. These are:
- The underlying market: This is the market you choose to trade – currencies, stock indices, commodities, and events.
- The strike price. The strike price is defined as the price at which the holder of an option can buy (in the case of a call option) or sell (in the case of a put option). Hence, the strike price is also known as the exercise price.
- The expiration date and time: You can trade options contracts lasting for up to one week, with a duration as short as five minutes.
There are four markets you can speculate on:
- Stock indices
For example, let’s say it’s 10 am, and the BTC price is $45,575. You believe that by 5:10 pm on July 17th, the price will be higher than $45,575, so you buy a higher(call) option. If at 4 pm the BTC price is higher than $45,575, you earn the payout of your investment; if it’s lower, you lose.
Another example is if you think the BTC price will go down. You then buy a lower (put) option. If the price at the expiration time is lower than the original price, you earn the option’s payout.
Pros of Blockchain Prediction Markets
- There’s no conflict of interest as all bets are matched and settled on the blockchain.
- You don’t have to know the exact value of Bitcoin when the option expires, only if it increased or decreased.
- You don’t have to have extensive knowledge in trading to participate in prediction markets.
- Payout is made at expiry.
Cons of Blockchain Prediction Markets
If you study traditional systems in detail, you will notice that the trading platform will always have an edge over the investor (you need to win over 50% of the time to break even). Because of this unpredictable nature, many countries have strict regulations regarding operating such a business.
A decentralized platform levels the playing ground as you’re not trading against the platform but people. Options trading can become highly addictive (just like gambling). No matter how knowledgeable you are, it’s impossible to consistently predict what prices will do within a short time frame.
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Before you decide to start trading with real money, you should ensure you place trades on a practice account, be confident in your trading strategy before using real money, and always remember to only trade with money you can afford to lose.