Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

CryptocurrencyMarket Commentary

Augur asks are Prediction Markets Profitable?

Augur (REP) or Reputation is proving the old adage that there is no such thing as bad publicity accurate. This cryptocurrency’s value has apparently shot up because of news stories connecting it to presidential assassination.

One of Augur’s prediction markets is taking bets on the assassinations of such figures as U.S. President Donald J. Trump (R-New York), Amazon founder Jeff Bezos, U.S. Senator John McCain (R-Arizona), Golden Girls actress Betty White, and Warren Buffett. That has even attracted attention from such mainstream news outlets as Newsweek.

That questionable publicity gave Augur’s Reputation altcoin, a Coin Price of $22.99 on August 8, 2018. The Coin Price led to a Market Capitalization of $252.869 million and a 24-Hour Market Volume of $5.817 million on the same day. All of that was achieved on a Circulating Supply of 11 million REP tokens.

Therefore, negative publicity can increase the value of cryptocurrencies. An obvious reason why that occurred is many people are interested in wagering and predicting the future. Journalists called attention to Augur’s efforts to do that.

The ancient Greeks turned to the Oracle of Delphi to forecast the future. Modern digital Oracles are called prediction markets.

Using wagers and Blockchain to Hedge Cryptocurrency

Augur is not trying to encourage anybody to kill politicians, billionaires, or TV stars.

Instead, the company is trying to figure out what the odds or likelihood of such violence is, so it can hedge against them. The prediction markets are really a data collection tool.

A predictions market is a futures market based on estimations of the outcomes of events. There are a number of Blockhain prediction markets out there including Stox (STX), Gnosis (GNO), and Sharpe Capital (SHP).

Simply put a prediction market uses wagering to collect data about an unfolding event. A blockchain prediction market rewards those who make accurate predictions with cryptocurrency. For example, Sharpe Capital rewards accurate stock and commodities market analyses with SHP.

The Most Ambitious Predictions Market Yet

Augur is designed to be the most ambitious blockchain predictions market yet. It intends to collect data from Political Forecasts, Event Hedging, Weather Prediction, and Company Forecasting.

Anybody can go into Augur’s Ethereum blockchain platform and create a prediction market. That’s where the weird markets about Betty White’s murder came from. A person can take odds on any event.

Then individuals can buy and sell shares in the market. The idea is that the level of shares will determine market or popular sentiment. The sentiment can be used to predict events in order to make hedging more effective.

Accurate predictors are supposed to be rewarded with Reputation tokens. Since the tokens are ERC20 altcoins they can be redeemed in Ethereum (ETH).

That offers some real value because Ether (ETH) is the second most valuable cryptocurrency. Unfortunately, Reputation (REP) cannot be converted through Bancor’s (BNT) liquidity network. Bancor’s protocol enables one ERCO token to be easily converted into another.

Joining Bancor would benefit Reputation, because Augur is hoping to build a mass market for its services with low-trading fees, user-created markets, automated payouts, and an open-sourced solution.

Augur is the creation of an organization called the Forecast Foundation. The Foundation calls itself “a group of developers and other technology professionals who are passionate about the potential of decentralized applications.”

Unfortunately, it is not clear who is financing Augur’s construction or what their motives are. Although a predictions market platform like Augur has a lot of theoretical value.

Do Prediction Markets have any Value?

The obvious value from prediction markets is from the fees charged to the users. Yet those fees are the just the beginning of the money that can made from prediction markets.

Yet, the data collected might be more value because many organizations want to predict the future. For example hedge fund operators and institutional investors want to know the odds of violence interfering in corporate or market operations. Political strategists want to know the odds of a Black Swan event altering election event.

An obvious hope here is that betters might have access to information that this not available or apparent to experts or pundits. For example, average people betting on an election, might have a more accurate impression of popular opinions of candidates, than journalists or professional politicians.

The general idea is that markets are better at filtering information than the media, or search engines. Another implicit belief is that the larger the market, the more accurate the information.

Therefore, a prediction market tries to gather as much information as possible by paying for it. Betting is used as an impartial means of determining accuracy of information.

Algorithms and Artificial Intelligence (AI) are used to determine the results in an attempt to get the most accurate information. Note: unlike Sharpe, Augur does not reveal if it uses AI or Not.

Building Better Algorithms and AI through Predictions Markets

The big hope is that entities like hedge funds, political consultants, investment bankers, and institutional investors will pay big money for the data collected. The data has many potential uses including the creation of trading algorithms.

The Forecast Foundation’s engineers would try to create algorithms that mimic the behavior of the most successful predictors. Those patterns would form the basement of open-sourced trading platforms.

That business plan is similar to that of Sharpe Capital (SHP) except that Sharpe plans to market its products to the financial services industry. Augur is creating open-sourced solutions, that will apparently be made available to all like Alphabet’s (NASDAQ: GOOGL) Android is.

One obvious use of the data gathered by Augur will be to try and teach AI how to predict the future with machine learning. The AI will watch how humans make predictions and try to imitate them.

Interestingly enough, Augur does not mention this use of its data on the website. Instead it simply has some vague wording about developing better trading algorithms.

Are Prediction Markets a Good Bet?

There is a bothersome lack of transparency at Augur. Unlike Sharpe it fails to reveal what use the information it gathers will be put to.

Beyond that there is no indication that Augur’s products will be any better than those of platforms with cheaper cryptocurrencies. These include; Sharpe’s SHP which was trading at 14.15¢ on August 8, 2018, and Stox’s STX which was trading at 15.3¢ on the same day. Although Augur’s Reputation was cheaper than Gnosis (GNO) which had a Coin Price of $40.09 on August 8, 2018.

If you want to take a chance on a prediction market cryptocurrency, invest in STX or Sharpe. Augur and Gnosis are grossly overpriced for altcoins associated with an unproven business plan. Still, it looks as though blockchain based prediction markets have a bright future even with all the negative publicity Augur is accumulating.