Sure! Let’s say that we make a trade I buy a share of “Jesus will return in 2025” from you for 3 cents. Here’s what that means in practice:
I give 3 cents to Polymarket, to hold until the end of the year. (In return, Polymarket gives me a “yes” share, which will be worth 100 cents if Jesus returns and 0 cents if he doesn’t return.) You give 97 cents to Polymarket. (In return, Polymarket gives you a “no” share, which will be worth 100 cents if Jesus does not return and 0 cents if he does return.)
If Jesus does not return by the end of the year, you get all 100 of those cents. If he returns, I get all 100 cents.
Now, let’s say that we’ve made this trade. Fast forward to November, and you’re interested in betting on the New York mayoral election. Maybe you’d like to buy shares of “Zohran Mamdani will win the mayoral election” because it’s trading for 70 cents, but you think he’s 85% likely to win, or something. You really wish you had those 97 cents that you gave to Polymarket to hold until the end of the year, because you can make a much more profitable (in expectation) bet now!
So you return to the Jesus market, to sell your “no” share. You paid 97 cents for it, but really, you’re willing to sell it for 95 cents now. You’ll eat that 2-cent loss, because at least then you’ll get to place that really good bet on the New York market, where you think you’re profiting a lot more in expectation. Meanwhile, I’m happy to be on the other end of that trade: I bought “Jesus will return” for 3 cents, and now I get to sell out of my position for 5 cents (by trading with you), earning me a guaranteed 2 cents.
(There’s some details I’m eliding: basically, a “yes” share and a “no” share “cancel out” to 100 cents, so if you hold both 1 yes share and 1 no share, Polymarket internally just credits you 100 cents, so it’s as if you get a dollar back and don’t hold any shares at all. I didn’t want to get into that because it’s a slightly confusing detail.)
It’s interesting to learn how how the dollar amount being placed on the bet was turned into percentage points. I was confused about that. Thanks for making it clear!
Just to make sure that I understand: does it make sense to describe the situation in terms of what I would call a hot potato dynamic?
In the beginning, the “No” shares are a cold potato, because most people don’t believe that Jesus will actually return.
But the incentive for people to buy “Yes” shares is their expectation that the people holding the “No” shares will sell their position later for money to place on other bets.
When the “No” shares are sold, they are sold for less because those who sell them expect a better profit the mayoral race than from the prophesy of Jesus returning.
So the people who bought “Yes” shares in the beginning can make a profit for a while—the potato is hot. People might even buy “Yes” shares because they expect more people to sell “No” shares in the future.
But at some point people will stop selling “No” shares. And those holding the “Yes” shares won’t be able squeeze anymore profit—the potato has now cooled, as it were.
Sure! Let’s say that we make a trade I buy a share of “Jesus will return in 2025” from you for 3 cents. Here’s what that means in practice:
I give 3 cents to Polymarket, to hold until the end of the year. (In return, Polymarket gives me a “yes” share, which will be worth 100 cents if Jesus returns and 0 cents if he doesn’t return.) You give 97 cents to Polymarket. (In return, Polymarket gives you a “no” share, which will be worth 100 cents if Jesus does not return and 0 cents if he does return.)
If Jesus does not return by the end of the year, you get all 100 of those cents. If he returns, I get all 100 cents.
Now, let’s say that we’ve made this trade. Fast forward to November, and you’re interested in betting on the New York mayoral election. Maybe you’d like to buy shares of “Zohran Mamdani will win the mayoral election” because it’s trading for 70 cents, but you think he’s 85% likely to win, or something. You really wish you had those 97 cents that you gave to Polymarket to hold until the end of the year, because you can make a much more profitable (in expectation) bet now!
So you return to the Jesus market, to sell your “no” share. You paid 97 cents for it, but really, you’re willing to sell it for 95 cents now. You’ll eat that 2-cent loss, because at least then you’ll get to place that really good bet on the New York market, where you think you’re profiting a lot more in expectation. Meanwhile, I’m happy to be on the other end of that trade: I bought “Jesus will return” for 3 cents, and now I get to sell out of my position for 5 cents (by trading with you), earning me a guaranteed 2 cents.
(There’s some details I’m eliding: basically, a “yes” share and a “no” share “cancel out” to 100 cents, so if you hold both 1 yes share and 1 no share, Polymarket internally just credits you 100 cents, so it’s as if you get a dollar back and don’t hold any shares at all. I didn’t want to get into that because it’s a slightly confusing detail.)
Does that make sense?
It’s interesting to learn how how the dollar amount being placed on the bet was turned into percentage points. I was confused about that. Thanks for making it clear!
Just to make sure that I understand: does it make sense to describe the situation in terms of what I would call a hot potato dynamic?
In the beginning, the “No” shares are a cold potato, because most people don’t believe that Jesus will actually return.
But the incentive for people to buy “Yes” shares is their expectation that the people holding the “No” shares will sell their position later for money to place on other bets.
When the “No” shares are sold, they are sold for less because those who sell them expect a better profit the mayoral race than from the prophesy of Jesus returning.
So the people who bought “Yes” shares in the beginning can make a profit for a while—the potato is hot. People might even buy “Yes” shares because they expect more people to sell “No” shares in the future.
But at some point people will stop selling “No” shares. And those holding the “Yes” shares won’t be able squeeze anymore profit—the potato has now cooled, as it were.
Yup, that’s right!
Thank you for taking the time to clarify things for me!