Opportunity On Augur 7 Examples Of Market Inefficiency
Posted On August 9, 2018
Someday, Augur may be the world’s largest, most efficient market, but that day is a long ways off. We’re still in the crack-of-dawn early days and it’s the Wild West. There’s a great deal of inefficiency, meaning a great deal of opportunity for the resourceful trader. Today, I’ll look at a few types of mispricing-based opportunities I’ve noticed on Augur.
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Look at this recent snapshot from a market predicting the likelihood of a large earthquake in the Bay Area in 2018.
At the time, you could sell shares in this outcome i.e., bet against it, for .10 eth. So in plain English, it’s a good deal if you think there’s less than a 10% chance of the outcome occurring.
Given that the USGS places the likelihood of such an event at 51% within the next 30 years, the likelihood that such an event will happen in the next 5 months is well below 1%, assuming this likelihood doesn’t decrease overtime (I live in San Francisco myself, so hoping this logic isn’t too shakable…)
However, because Augur has low liquidity, nobody wanted or was able to lock up 2.7 ether for an almost guaranteed .3 ether in 5 months. Or since there are so few traders on Augur and low volume markets are less prominent in the UI, nobody was even aware of this opportunity.
In a mature, crowded prediction market this type of inefficiency would not exist, at least not for long. But this price was sitting there for a few days before I posted it on Reddit spurring someone to fill the bid.
To make this example useful in a broader way, here are a few filters for how to look for this particular type of market inefficiency/opportunity.
Look for low volume markets speculating on low probability events. This means low buy offers, which require sellers to lock up funds for minimal gains
The probability should be measurable by (relatively) unbiased expert sources
It should not be a prediction susceptible to insider knowledge e.g., it’s unlikely that anyone ‘knows something’ about the risk of earthquakes that could explain a seemingly irrational price.
This week we saw two things happen in tandem: an acute drop in crypto prices along with sky-high gas prices on Ethereum Mainnet. Since one must pay gas to remove orders on Augur, outdated (read bargain) prices tend to linger on the order books. This creates opportunity for relatively high conviction, high volume trades. You just need to make sure that the gas prices don’t offset potential gains.
In the above snapshot, you could sell shares for over .50 i.e., bet that there’s an over 50% chance REP will NOT exceed $30 at month’s end. Given that REP was falling like a brick down past $24 when this snapshot was taken (it’s rebounded some since) without any obvious short-term reversal catalysts, these prices were a bargain and the order book was overdue for a correction.
This sort of mispricing is probably amplified by the fact that folks don’t like to spend when they’re losing money and all Augur traders hold at least some crypto (you need Ether to trade on Augur). So when crypto is falling and gas prices are high, look for lingering bargains in the order books.
Bounty and Manipulation-Prone Markets
In a bounty market, sellers i.e., traders betting against the outcome, effectively create a bounty incenting anyone who has the power to make the prediction come true to do so and buy YES shares.
We just saw a nice proof of concept for bounty markets. BlockWolf posted an Augur tutorial on YouTube (excellent tutorial by the way) and created a market for whether the video would hit 5,000 views. The market has drawn 44 eth in volume, and one or more YES buyers ended up purchasing YouTube views (I know this since I was one of them). It turns out you can buy a couple thousand YouTube views for under 5 bucks.
So with any outcome on Augur think about whether market actors (including yourself) can steer the outcome in either or both directions. If it’s easier or only possible to steer the outcome in one direction than it’s probably a good idea to bet on it.
In a bounty market, (apparent) mispricing can be due to the fact that certain market actors are 1) not aware that the outcome can be easily rigged 2) do not think there will be enough volume to incent other actors to rig the outcome or 3) are driven (ideologically or by profit) to actually create a bounty and incent the rig or 4) are one move ahead and know something that others do not e.g., if BlockWolf himself or somebody who works at YouTube planned to take down the video or disable views.
There are many biases that come into play in prediction markets, including cognitive, ideological, and political bias. This is a huge topic that I plan to dive into in future posts. One example though is self-selection bias on Augur. Users will be excessively bullish on crypto, especially Augur and Ethereum (since Augur is built on Ethereum). As I recently wrote,
The fact that you have to download Augur, sync a local DB, use something like Metamask, and actually own Ether (or know how to access it) to trade on Augur, serves as a de facto barrier for anyone who is not hardcore into crypto.This is like if you had a market speculating on the future price of tobacco where only tobacco farmers could participate. The prices would be excessively bullish.
So markets predicting price rises in crypto will likely be overpriced, though this effect may be offset at times by short-term spikes in bearish sentiment during crypto market downturns.
It’s possible for a market to be mispriced simply because traders don’t realize what they’re actually betting on. Due to either negligence or sneakiness on the part of market creators, some markets on Augur are misleading i.e., the title of the market implies something different than the actual subject of prediction. Look closely at the snapshot above. On first glance, it looks like you’re speculating on what the gold price will be at the end of 2018. But if you look under “Additional Details,” you’ll see that’s not the case.
Always make sure to read the fine print!
Sparse Order Books
Due to low liquidity and sparse order books, sometimes you can get bargains simply because folks are eager to get into a trade as quickly as possible so they place high bids or low asks.