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“The participants' views influence the course of events, and the course of events influences the participants' views.”

— George Soros, on the reflexivity of markets and life

Thursday spooky mailbag

Q: I’m a single-issue crypto voter. Who should I vote for next week?

Depends on what kind of crypto person you are.

If you’re enthusiastic about stablecoins, ETFs and altcoins that look like companies, the consensus thinking is correct: Institutionally minded, a16z types should vote Trump.

But if you’re enthusiastic about censorship resistance, self-custody and financial privacy, the consensus thinking may be incorrect: Cypherpunk types should vote Harris.

A vote for Harris is a vote to force crypto underground where it would be developed by ideologues unwilling to compromise on crypto’s foundational principles — growing up in harsh conditions would make crypto more resilient.

A vote for Trump is a vote to bring crypto into the light where it would be shaped by the likes of BlackRock, MicroStrategy and the SEC — growing up in friendly conditions might make crypto easily co-opted.

Like Obi-Wan Kenobi, crypto could re-emerge more powerful if it’s struck down, so the single-issue voter’s choice isn’t just pro- or anti-crypto, but what they want crypto to become. 

Trump is of course a better outcome for the crypto industry (this newsletter included). 

But if you want to make crypto cypherpunk again, you should probably vote Harris.

Q: Do real cypherpunks even vote?

No, probably not. Good point.

Q: Are prediction markets being manipulated in Trump’s favor?

Last week I suggested they were but the big bettor on Polymarket has since been doxxed as a Frenchman without any obvious ties to the Trump campaign, and who appears to be betting for financial reasons.

Also, the odds on other betting sites no longer make Polymarket look like an outlier.

So now I have a new theory.

It might be that Trump’s odds are higher on betting markets than polling would suggest because it’s mostly men who bet on elections — and mostly the type of men who struggle to imagine why anyone wouldn’t vote for Trump.

As a believer in the efficient markets hypothesis, I’d normally expect this lopsided demand to be offset by professional gamblers and I’m sure that’s happening to a degree.

But it might also be that professional bettors require an unusually large margin of “expected value” to take the other side of election bets simply because these bets are so infrequent.

If we voted for president every day (not the worst idea, really), professional bettors would presumably be happy to take the other side of a bet that is just a couple of percentage points wrong. 

But how much of a margin do you need to take the other side of a bet that you will probably lose when the next chance to make your money back is in four years?

Poker players and sports bettors are happy to make bets they expect to lose but political bettors may not be.

Q: OK, but why don’t they believe the polls? 

Right. That’s the other part of my new theory.

I suspect Trump bettors are looking at his one-point lead over Harris in the swing states and quite reasonably assuming that his actual lead is much larger than that, simply because the polls underestimated him in both 2016 and 2020. 

The problem with this thinking is that most pollsters do try to be right (their future employment prospects depend on it) and they for sure don’t want to be wrong three times in a row.

As a result, they are most likely adjusting their polling results in Trump’s favor this time around.

Specifically, many pollsters are attempting to avoid a repeat of 2016 and 2020 by adjusting their polls according to who their respondents say they voted for last time — “weighting on recalled vote,” is the industry term, as the New York Times explains: “Many pollsters are weighting on recall vote because it yields more Republican-leaning results.”

The article’s author suggests pollsters may even be overcorrecting from 2020, in which case it’s possible the polling error could go in the opposite direction this time.

So, here’s part two of my new theory: By paying up for Trump, prediction-market bettors are making an adjustment that pollsters have already made for them.

It might not matter, Trump bettors may well still win even if my theory is correct — but by a smaller margin than prediction markets are implying.

Q: How will we know if the prediction markets were right?

That’s a good question because people still say Nate Silver was wrong about Trump in 2016 because he gave him just a 33% chance to win. But we’re dealing in probabilities here and 33% was much higher than any other reasonable pollster gave Trump, so Silver was right.

This time around, Trump bettors will say they were right no matter how close the election is, but betting on Trump at 63% implies a substantial margin of victory, much more so than the 53% chance that Silver is giving Trump this time.

So Trump will have to win by a lot for prediction markets to be vindicated. 

Q: Are prediction markets affecting the election outcome?

The Wall Street Journal opined this week that “Republicans seem more optimistic, and Democrats more pessimistic, than the evidence warrants.”

That feels right to me and it also feels like prediction markets are largely what’s driving it.

The natural question then is whether that sentiment could become self-fulfilling.

There doesn’t appear to be any academic literature to go by — this may be the first election where prediction markets are a significant enough factor to study it.

But prediction markets are, well, markets and George Soros thinks markets are prone to reflexivity: “Distorted views can influence the situation to which they relate because false views lead to inappropriate actions."

If so, election bettors may be manifesting the result they’re betting on.

Spooky, indeed.

— Byron Gilliam

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