US Election 2024: Onchain Insight

A Modern Election Cycle

Across asset groups the US Elections have historically created years of volatility within the financial markets. With each party promising different economic strategies, trading ideas are formulated to determine which investments will rise and fall based on the elected candidate.

Cryptocurrencies have been a spotlight of the US campaign. Trump has openly pitched himself as the pro-crypto candidate, vowing to make the United States “the crypto capital of the planet and the Bitcoin superpower of the world” during his appearance at the Bitcoin conference 2024 and separately is accepting cryptocurrency as a form of party donations. This differs from the increased regulations backed by the Democratic party. We have seen clear correlation between significant events unfolding in the 2024 presidential campaign, the changing probabilities within political betting markets and spot price in Bitcoin.

Polymarket is an on-chain prediction market providing a platform for users to trade probabilities on different subjects. The Presidential Election Winner 2024 prediction market offers a key insight into the probabilities of each candidate’s win in November and provides a reflection of real time sentiment. Similar to traditional betting sites, users are able to place “bets” on the probability of a binary outcome and trade the probabilities. The key difference between traditional betting sites and Polymarket is that the bets are placed in cryptocurrency, in this case USDC, and the debates are settled through smart contracts. Like off-chain betting markets, Polymarket uses a trading style format that allows users to buy and sell positions at prices which track probabilities.

Why does Polymarket work?

Prediction markets are a powerful tool and the “world's largest prediction market”, Polymarket, makes no secret of its goal: “Polymarket is the future of news.” A reflection of real life sentiment and an indicator of what the future holds. With growing wariness of mainstream media outlets and stories pushed by social media, it is easy to understand why people are turning towards decentralised sources of information to get a wider picture of real life events.

Explored below is the foreshadwoing of Biden dropping out, which could be noted in Polymarkets’ odds even before this was confirmed as fact through official channels. Traditional bettings sites use fixed odds, maintained by models and systems coded in the infrastructure. Betting exchanges take a different approach- decentralised pricing determined by user activity. What remains is the big question: Why does Polymarket work?

Prediction Markets

Markets can be centred on any event and a question is proposed with corresponding answers covering the scope of outcomes. The “rules” of a poll are outlined by the creator and will usually include a resolution date, a resolution source and any conditions which will be taken into account at poll settlement. An example is given below in Figure 1.

Prediction markets on Polymarket are underpinned by Smart contracts on Polygon, a Layer 2 blockchain and side chain of Ethereum.  When a new Yes and No position is matched, it is communicated to the Smart contract which facilitates the creation of outcome tokens (also known as conditional tokens).

Users are able to buy and sell their positions as seen in figure 2, trading the probabilities of an event happening off chain by Polymarket’s order book system. The price of each outcome token is determined by the market with supply and demand dynamics reflected in pricing. Yes and No positions sum to approximately 1USDC making Polymarket an easy to understand indicator of the changing probabilities of an outcome. For example a Yes position could be priced at 53USDC and No at 47USDC reflecting a 53/47 spread of the market's beliefs. Market settlement is handled on chain by the smart contracts on the Polygon network.

Settlements, Disputes, and UMA

At settlement, correct positions are awarded 1USDC or 0USDC per share for incorrect positions respectively. When a market is deemed to be unresolvable, 0.50USDC is awarded to each counterparty regardless of the initial price they staked to enter the market.

Polymarket settles polls through an external decentralised resolution platform which uses human input to resolve and dispute proposed truths. In the case of Polymarket, the system relies on UMA.XYZ’s “Optimistic Oracle” (OO).  The human input is an important component since there is complexity in uploading real life events on the chain while remaining decentralised. Once a resolution is found, the OO delivers it on chain to the smart contract and polls are settled according to the outcome selected.

Market truths and disputes can be proposed by any $UMA tokenholder on the system. The proposed answer to the poll is taken to be optimistic – that is, accepted to be true unless disputed by another user during the “challenge period”. Initially $UMA tokens must be staked to dispute an answer and participate in the dispute poll. Participating users cast a blind vote with 4 options to choose from, as shown in figure 3 and the majority decision is considered “correct”. Incorrect stakes are slashed and distributed to “correct” users who receive a proportional yield. This process works to promote a fair, honest and decentralised dispute system in the OO.

The Political Story

US politics plays a major part in the macro picture of many assets and also has a direct impact on crypto. Prediction markets have value as a real time sentiment index and as a data set for changing probabilities of real life events. It can be assumed that the changing probabilities are priced into the TradFi markets. Given the magnitude of users on Polymarket, a wide range of opinions can be collected and by tracking the amount of USDC staked to enter a poll, it can be noted which topics users feel most invested in.

For example, following Trump’s failed assassination attempt (evening of 13th July), Trump’s probability of winning the election spiked on Polymarket, as seen in figure 4. Crypto markets are 24/7 so also reacted in real time with a similar spike spread over a longer horizon. The political probability and BTC spot correlation can be seen to increase around significant political events.

Given that this event unfolded on the weekend, Polymarket provided an early indicator of sentiment which could be seen reflected in the wider TradFi markets open on Monday. A price change was noted particularly for assets considered to be in the “Trump trade” following his failed assassination.

In our graphs, the RealClearPolitics Betting Average index is used as a benchmark for the Polymarket comparison. It consists of 7 betting sites aggregated noted in figure 5: BetOnline, Betfair, Bovada, Bwin, Polymarket, PredictIt, Smarkets. These sites cover a range of betting formats, for example Betfair works as a traditional betting site, Smarket is an off chain betting exchange and Polymarket, an on chain betting exchange. Between the betting sites there is discrepancy in odds, for example in our snapshot this is a 7% range of differing probabilities in both Harris and 5% for Trump respectively.

There is strong correlation between Polymarket odds and the RealClearPolitics Betting Average index. Wider political events can be noted in the odds evolution in figure 6. In particular the beginning of Biden’s probability decline following the Biden Vs Trump debate (June 28, 2024); a further decline after his initial Covid announcement (Jul 17, 2024) and the drop to zero once confirmed that he will be stepping down from the 2024 presidential race (Jul 21, 2024). At the same time Harris gained popularity and her announcement as official democratic nominee (Aug 5, 2024) only added to her success. For Trump, a key moment to note is the almost instantaneous increase in odds following his failed assassination (July 13, 2024).

It is interesting to note that Polymarket historical data has consistently priced in higher odds for Donald Trump’s success. This could indicate a selection bias within Polymarket’s user base. It is noted that Trump is the pro-crypto candidate and Polymarket is exclusively for users who engage in crypto and USDC Tokens. Therefore it can be theorised that Polymarket users are more inline with Trump’s campaign potentially swaying their conviction of campaign strength. For those participating in Polymarket odds, this indicates a premium in buying Trump’s probability and a cheapness on the other side of the market. As a macro sentiment index, the slight disparity within probabilities across different betting sites is worth noting. It is also interesting to note that the Trump premium on Polymarket, noted in figure 6, has narrowed with both Trump’s and Harris’ pricing odds becoming more aligned to the real clear politics index.

The evolution of the odds of winning for key political figures on Polymarket is showcased in figure 7. Through aligning these market movements to the political narrative, a powerful source of assessing how important an event is in the macro picture can be created.

Prior to the 21st July, Trump was the frontrunner in the polls. The sentiment around Biden being Democratic leader immediately changed after the Biden Vs Trump debate (June 28, 2024). At a similar time other democratic leaders picked up market share. This is an interesting foreshadowing of Biden later stepping down from polls and the nomination of Kamala Harris. The subsequent evolution from a Biden Vs Trump race to Harris Vs Trump race is also outlined in the Polymarket data.  As time continues, Harris has been gaining market share from Trump seen in figure 8, with the latest results putting Harris in the lead at 50/49 (Aug 20, 2024) .

Intraday Volatility

Polymarket’s odds have a high volatility. This may reflect the exchange style trading of bets on Polymarket resulting in people being able to enter and exit positions more easily. The index consists of multiple sources aggregated and has a daily frequency which leads to a smoother output. Much of Polymarket’s intraday volatility, as seen in figure 6, can be interpreted as “noise” resulting from trading, as opposed to meaningful changes in market sentiment on the presidential campaigns. For example, in figure 11, over the last 24 hours Harris’ probability varies between a low of 49.25 and high of 50.60 representing a 3% variation in her implied odds.

With a wide user base varying in expertise and risk tolerances, individuals will engage with the markets differently as they react to changing market sentiment. An individual's view of the fair price will be influenced through external factors such as their consumption of social media, headlines and rumours. Although the volatility can be meaningful to understand points of political developments in campaigns, discretion is needed to understand which changes are actually a reflection of sentiment.

The longer term sentiment change is useful in identifying trends and possible risk factors in other asset classes given the increase in correlation between politics and markets around the US elections. Monitoring the Polymarket probabilities over a longer horizon can provide a useful insight of the lasting changes in the political landscape.

The Power of Polymarket

Polymarket’s prediction markets allow users to express their opinion on the Presidential Election Winner 2024, which differs from the question: Who will you vote for? This is where Polls come in. They often pose similar questions in different ways leading to a deeper understanding of participants' views and also purposefully include a diversity of thought, outlining the participant’s diversity statistics. This allows for a more representative view of the general public's opinions. On the contrary, Polymarket and betting sites will have a selection bias yet they allow for larger user bases and real time probability updates. For major events, a static poll wouldn't be able to capture the dynamic moves of public opinions. Overall, the data must be viewed through the lens of the wider context.

In conclusion, Polymarket is a valuable alternative data source, offering an innovative perspective of the macro political sentiment through its Presidential Election Winner 2024 market. The real time movements of probabilities provide a nuanced approach to measure sentiment and when incorporated into broader investment strategies, can be used to affirm market views. This is particularly helpful overnight, over the weekend, and during market holidays to gauge where sentiment is in advance of the TradFi market opening. This is particularly relevant for the assets which have a heavier dependency on political stances, such as renewable energies, oil, weapons and crypto.

Polymarket’s model relies on the knowledge of its participants and their collective intelligence to efficiently price markets. This will mean that the users with a high conviction on their views will be able to assess when a probability is at a discount or premium and make money buying or selling respectively which will push prices to a fair value. As realised above, Polymarket’s pricing differs at various points from the RealClearPolitics Betting Average index, for example with the systematic premium assigned to Trump ahead of  Harris’s nomination, which has recently narrowed. The financial incentive of payouts for correct predictions, ensures that the trading remains lucrative for investors to participate in. Following polymarket poll movements is advantageous during live periods of political uncertainty, as market sentiment can be captured immediately, in contrast to static polls.

Conversely, traditional financial assets as a political indicator may have a lag on movements given there will be other asset specific factors affecting intraday trading. Encompassing Polymarket’s data into existing investment frameworks can make market views more dynamic and allows for a proactive approach to decision-making. It follows that as the intersection between politics and finance becomes more intertwined, leveraging alternative data points can serve as a competitive advantage in the evolving political TradFi landscape.

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