0:06 Hello traders. This is going to be such
0:09 a fun video. Really, really, really
0:10 looking forward to this one. I have a
0:13 bold theory and I'm going to invite you
0:16 to join me in this bold theory. You
0:18 might agree, you might disagree, but I'm
0:21 going to present the facts and we'll go
0:24 from there. I believe that right now in
0:28 2025 about to be 2026 we are all
0:29 thinking about prediction markets
0:31 completely wrong. I think that the
0:34 actual pricing for prediction markets
0:37 100% is actually all incorrect. Let's go
0:40 into it. First thing that I want to say
0:43 is well two things. First of all uh
0:45 where am I coming from? I love trading
0:47 on on Kelshi and Poly Market. This is my
0:49 P&L on Kelchi. You can go look me up.
0:52 I'm Bitcoin Trading Challenge. All of
0:54 this profit has come in two months. So,
0:56 I've been uh making some pretty good
0:57 income. A lot of it has been in sports
1:02 and in crypto markets on Kelshi. Now, I
1:04 am super super super excited to announce
1:07 that I have a new partnership with a
1:09 company called Slice. This is a platform
1:11 that sources the best traders, gives out
1:13 all of their private alpha. And if you
1:15 are interested and you click the link in
1:16 the description below, you will get all
1:18 of my thoughts in the market, high alpha
1:20 articles, and direct engagement with me
1:24 as well. I also have a 70% off promo
1:26 going on right now that is first come
1:27 first serve. So, if you want to go check
1:30 it out, it's just a really cheap way
1:33 that you can get access to alpha that I
1:35 would rather keep uh you know, gate locked.
1:37 locked.
1:38 All right, with that out of the way,
1:40 definitely go check out Slice and let's
1:42 go in.
1:44 So the also this is what slice looks
1:48 like. Do poly markets or prediction
1:50 markets actually represent probability?
1:52 I want you to imagine that we are
1:54 watching a sports game where we can buy
1:57 at 98%. You look at an external sports
1:59 book and you see that the true odds the
2:02 true value uh the true probability that
2:03 that this is going to happen are also 98%.
2:05 98%.
2:08 Our bet guys has neutral expected value.
2:10 We are not expected to lose money or
2:13 make money over time, right? Well, I'm
2:14 going to invite you in to take a look at
2:17 a Monte Carlo simulation of this play so
2:20 we can see our P&L over time.
2:23 How often does our 1500 bankroll stay
2:26 above 980? Why did I pick 980? Well, I
2:28 want you to imagine a scenario where we
2:32 are buying 1,000 shares at 98%. That is
2:34 a cost of $980.
2:36 Now I want you to also imagine that we
2:40 have a total bankroll of 1,500. So we're
2:42 risking 980 to make 20. We're buying at
2:45 98%. You know, you get it. And our
2:49 overall bankroll is 1500. Now this shows
2:52 you over time. I did tons of simulations
2:54 and here is the average.
2:58 This is bizarre, guys. Seriously. I mean
3:02 look at this. Over time, you will very
3:06 very very very very likely uh not be
3:09 able to have even over $980 in your
3:11 account um by a certain amount of
3:14 trades. But why is that? I did this
3:17 simulation where I'm buying at 98% guys
3:20 and guess what? Um the odds are 98%. So
3:24 I should be winning, you know, $20 98%
3:28 of the time. However, even with a few
3:29 trades, you can see just how quickly we
3:32 go to a 50% probability that you will
3:36 not even have one bet of $980
3:39 on a $1,500 $1,500 account. Um, even
3:43 over just a few dozen trades. The more
3:44 trades you take, the more likely it is
3:46 betting that size of your bankroll that
3:48 you will not have enough to even place
3:53 one bet of a thousand shares at 98%.
3:55 Why? This is called the bankroll effect.
3:57 This is the first reason why I think
3:59 prediction markets are all priced wrong.
4:02 Look, if you lose 50% of your account,
4:03 which in this case it would be an even
4:05 larger loss. But if you lose 50% of your
4:07 account, like let's say you go from one
4:10 grand to $500, you know, you got to make
4:12 an 100% profit in order to get to get
4:14 back to break even. 100% profit on a
4:17 $500 account, you have now account of
4:20 a,000, which is what you started with.
4:22 This can be mitigated buying high odds
4:24 can be mitigated by just not betting
4:27 more than let's say 20% of your bankroll
4:29 but the effect of a loss on your
4:30 bankroll is still going to be quite
4:32 massive due to the high odds that you
4:35 purchased. Moreover, and maybe the most
4:38 important part here guys, emotions. Do
4:40 you know the emotional effect of losing
4:42 such a substantial part of your
4:45 portfolio? For example, here, if you
4:47 lose this bet where you buy at 98%. You
4:51 lose $980 on your $1,500 account, will
4:53 you really be able to stay level-headed
4:56 and still take plus EV plays? No. I
4:57 think you would likely have a negative
5:00 edge. Uh, you would over gamble and you
5:03 would be pretty much engaging in minus
5:06 EV, also known as negative expectancy
5:08 behavior. The first reason why I think
5:10 that prediction markets should not be
5:12 priced the way that they are, such as a
5:16 90% chance represents a 98 a 98 uh
5:18 percent chance for true odds. This is
5:20 the first reason.
5:22 Second reason, optionality. If you buy
5:25 at 1 cent, a lot of the times, did you
5:26 know you can actually sell back at one
5:29 one cent for no loss? If I'm first in Q
5:31 at 1 cent and I get filled on a
5:33 prediction market, I can wait for things
5:35 to play out and then just sell right
5:37 back at 1%.
5:39 You can't really always do that when you
5:42 buy at 98, right? Sometimes you can, but
5:45 not always and the risk is insane. So if
5:47 you buy at say 3 cents, you can sell at
5:49 five, you can sell at two for a slight
5:51 loss. There's so much more optionality
5:53 here. On the contrary, we just don't
5:54 have a lot of optionality if we buy at
5:57 97 when it comes to expected value.
5:59 Guys, if you buy at 97 cents on a
6:03 prediction market, if you sell at 98, do
6:05 you know what you just did? You just
6:07 risked 97. So, let's say it's a,000
6:11 shares. You just risk $970 in order to
6:14 make 10. That's not a great riskreward,
6:16 right? So, we don't have as much
6:17 optionality when it comes to buying
6:20 incredibly high odds. And let's say that
6:22 if we were to even take a slight loss by
6:25 buying on high odds. Well, if you buy at
6:28 97 and try to sell at 96
6:30 already, you have so much capital at
6:34 risk that it just all isn't really worth
6:36 it, even if you're just going to have a
6:38 $10 loss. Also, liquidity, you might not
6:41 even be able to sell. So, buying cheap
6:43 odds gives you fantastic optionality
6:45 where you can sell at no loss, you can
6:48 sell at fantastic profits, like a double
6:51 within seconds. Um, you can't really
6:52 double your money if you're buying at
6:55 80%. high odds, right? This is a reason
6:57 why I think a lot of these prediction
7:00 markets are not really pricing things properly.
7:02 properly.
7:04 Third reason and the most important by
7:06 far. Um, well, bankroll is pretty
7:07 important, but this might be the main
7:11 reason I think path dependency. So, two
7:13 bets with the same probability can have
7:14 just radically different trading
7:16 outcomes depending on price movement,
7:19 draw down, and opportunity costs. So
7:21 there are so many examples of this, but
7:24 let's say that you buy at 90%. Let me
7:25 give you two different scenarios of what
7:28 can happen to you. You buy at 90% and in
7:30 one scenario you cleanly go up every day
7:33 and it goes to 99 and the market gets
7:35 resolved. You win. You walk away and no
7:38 one really cares. The other scenario,
7:42 imagine that you go from 90 to 62. [sighs]
7:43 [sighs]
7:44 And now you have a substantial part of
7:46 your portfolio in this. you're feeling
7:48 very emotional and kind of feeling like
7:51 you want to sell. So, let's say you sell
7:52 a little bit and then price actually
7:56 goes to 100%. Because you derisked,
7:58 uh, you're going to be end up losing
8:00 even though you bought at 90 and it and
8:02 it exited at at 100%. Because you
8:04 d-risked a bit, your overall P&L is
8:06 going to be negative. That is completely
8:08 different, guys. That's what path
8:11 dependency is. So, probabilities
8:12 currently on prediction markets are are
8:15 sort of ignoring this. Lower probability
8:17 options tend to have much better paths.
8:21 Such as if we're buying at 1% guys, does
8:23 it go to four? Does it go to five?
8:25 Whereas if we buy at 99%.
8:28 The paths that the 99% can take are
8:31 typically pretty abysmal. Right? And
8:34 also when you buy lower probability
8:36 options, it tends to lead to far less
8:38 emotional trading. Guys, if you buy a
8:41 thousand shares at three cents, that is
8:44 a cost of $30, which for most people in
8:47 Poly Market in Koshy isn't really much
8:49 of a sweat. A $30 bet. If you buy at
8:53 97%, that's a $970 cost. That's a bit
8:55 more of a sweat, right? So, if a trader
8:57 buys at a high probability and the
9:00 market turns against him, there also
9:02 might not be enough liquidity for you to
9:04 even exit or derisk. When you buy at low
9:06 probabilities, what I have seen is
9:08 there's typically a lot of liquidity
9:10 because it's cheap. You can put out
9:12 10,000 shares at one cent, guys. People
9:14 don't always put out 10,000 shares at 82
9:16 cents, right? If the market's trading at
9:20 90 because 10,000 shares at 82 cents is
9:23 8.2 grand cost. 10,000 shares at 1 cent
9:26 is a hundred bucks. Yeah. Completely
9:30 different scenario. Seriously. So there
9:32 might not even be liquidity for you in
9:34 uh the path if you buy at a high
9:36 probability and try to derisk your
9:39 ability to flip for profit, cut losses
9:42 cheaply, reposition at better odds. Uh
9:44 great example of that. You buy at 5
9:46 cents, you sell at four, you reby at
9:48 two, that's a good trade as long as we
9:51 go up from two, right? It this all
9:54 depends on how prices move before
9:56 resolution. And a lot of markets are
9:58 just not factoring in this case at all.
10:01 Here's a really cool example to show you
10:03 how prediction markets should be priced
10:06 if they were hyper hyper hyperrational.
10:10 4 cents to 8 cents. You have just bought
10:12 at 4 cents with the plan of holding
10:14 until your limit sell at 8 cents gets
10:16 filled or you lose your entire bet. You
10:19 have put in $100.
10:22 If there is a 55% chance that you get
10:25 filled at 8 cents, this play is
10:27 incredibly plus EV. Look at the Monte
10:30 Carlo average cumulative P&L graph we
10:32 have here. This is 100 simulations of
10:34 100 trades. Super simple. Where the
10:37 probability of a win is a 55%. Because
10:39 you know, I wrote that in there.
10:41 Probability of a loss is 45% and you
10:44 know the stake, the win, and the loss,
10:46 right? Buying at four and selling at
10:48 eight, by the way, is a double of your
10:52 money. $100 turns into 200 over time. Uh
10:54 this is so plus EV you would be printing
10:56 money uh just the more trades that you
10:58 take. Right now I want to ask you
11:00 something. Do you think that in most
11:03 scenarios when you buy at 4 cents is
11:05 there a greater than 50% chance that
11:07 you'll be able to sell eight? If there
11:10 is then the market's mispriced
11:12 especially in sports markets too. If in
11:14 a lot of sports markets it's so easy for
11:17 you to flip your trade from 4 cents to 8
11:20 cents, then these markets shouldn't be
11:22 trading the way that they are, right?
11:24 Another example of why this is actually
11:27 happening. Well, on a sports book, you
11:28 can't really take profit, guys. If you
11:31 buy at plus 500 odds, your cash out
11:33 price is going to be abysmal no matter
11:35 where price goes, right? Because sports
11:38 books have a very high vig. So, if you
11:40 try to actually cash out, uh, you're
11:42 going to be losing a lot of EV. In
11:44 prediction markets, there's no VIC. It's
11:46 just whatever price you want to buy or
11:49 sell at. So, here the game is a bit
11:50 different. And this is just another
11:52 reason with path dependency and actual
11:54 probabilities of doubling versus losing
11:57 at all that these markets are all
11:59 mispriced, guys.
12:02 So, finally, exit uh versus final
12:04 resolutions. A lot of traders these days
12:05 aren't actually going to hold until
12:07 resolution. Go look at volume versus
12:09 open interest. You're going to see, man,
12:12 that a lot of there's a lot more uh
12:14 volume relative to the open interest of
12:16 the market, showing people are trading
12:18 far more than they are holding till
12:20 expiration. People are trying to flip,
12:22 right? Therefore, the price should
12:24 reflect the probability of being able to
12:27 exit at a better price. For example, the
12:29 percent chance of odds going from 4
12:31 cents to 8 cents and not the probability
12:34 of a final outcome. Okay? A contract
12:36 should be overpriced relative to final
12:38 probability but underpriced relative to
12:40 expected future trading range. I know
12:43 that is very very very complicated but
12:45 let me just make it super super simple
12:48 for you. A 4centent contract right that
12:51 has a 55% chance of going to eight
12:53 should not be priced at four. It should
12:55 actually be a little overpriced. It
12:58 should be maybe at like 4.5 4.4. That's
13:00 what the theoretical value of the
13:03 contract should be. Right? So that's the
13:04 way that these markets should run, but
13:06 they're not really because markets
13:09 should be pricing tradability, not the
13:10 truth of what's actually going to happen
13:13 in the market. Uh, another reason that
13:15 this is all a little bit muddy is
13:17 because of interest rates. If a
13:20 prediction market expires in one year,
13:22 it should absolutely not be trading at
13:24 99 cents because you would be a fool to
13:28 buy at 99 even on a absolute 100% given
13:30 outcome where it says this market will
13:33 resolve to 100% if we are solvent no
13:36 matter what. You should never be buying
13:38 99%. Because you can make far more than 1%
13:40 1%
13:44 um anywhere else in 365 days. So that's
13:47 another reason why markets shouldn't be
13:49 priced as high as they are, you know,
13:52 when they're longer term. What does all
13:54 this mean? There's no perfect way for me
13:56 or you to price a market on poly market.
13:58 We're not supercomputers, right?
14:00 However, a market that expires in say
14:02 half a year that has inherent true odds
14:05 of 98% should absolutely not be traded
14:07 at 98% by any rational market
14:09 participant. This is going to be due to
14:12 interest rates, but other reasons too.
14:14 the optionality of buying cheap, ease of
14:16 cutting losses when you get those cheap
14:18 odds, the bankroll effect, i.e. if you
14:20 buy at 2% and you lose, no one cares. If
14:23 you buy 98% and you lose, you die kind
14:26 of. Uh, and the overall emotional
14:28 well-being, ability to make plus EV
14:30 decisions when you buy cheap odds versus
14:32 expensive. I don't know about you, but
14:35 when I buy at 2 cents and it goes to
14:37 zero, I don't really care. It's
14:39 expected. If I buy at 98 cents and it
14:41 goes to zero, my ability to make good
14:42 decisions is probably going to go out
14:46 the window. Wouldn't you say so? So that
14:47 is just something that I wanted to
14:50 share. Uh these are the three reasons
14:54 why I think that absolutely um
14:55 prediction markets are all mispriced
14:57 especially sports markets that are just
14:59 taking in the API of sports books and
15:01 just reflecting those improbabilities. I
15:05 think that there is too much that in in
15:07 the history of a lot of markets too much
15:09 of the time uh prices are actually not
15:11 going to just go to 90 and then slowly
15:13 go up to 99. Uh a lot of them are a lot
15:16 more volatile than that. And this is
15:18 basically a presentation on showing you
15:20 that you know the volatility and the
15:23 path dependency of these markets matters
15:25 a lot more than the true inherent
15:27 probability uh you know at the absolute
15:30 final. So, this is something that I
15:31 wanted to share with you guys. I've had
15:34 this idea for a while that all of these
15:35 prediction markets are pretty much
15:38 priced wrong. And I've been able to make
15:40 uh, you know, dozens of thousands of
15:42 dollars so far. Uh, basically exploiting
15:44 the fact that these probabilities are
15:48 just completely uh, wrong a lot of the
15:50 time. And I'm I'm really interested to
15:52 hear what people like Domer and other
15:54 top uh prediction market traders think
15:56 of this about the path dependency, the
15:59 bankroll effect, the optionality, time
16:02 value that uh a lot of the times markets
16:05 should never be trading at 98.99 unless
16:08 their true odds are far far higher than 98.99%
16:09 98.99%
16:12 and the expiration's within a day or
16:14 around there. Finally, I also have a buy
16:16 me a coffee if you're curious about the
16:19 two different platforms. Slice. If you
16:20 want my thoughts in the market, high
16:22 alpha strategies, buy me a coffee is
16:24 fantastic. If you want my live streams
16:26 and my articles, whatever you pick, I'm
16:28 happy. Happy trading everybody. And
16:30 thank you for sticking with me on the
