Australia Drops Blunt Truth About Prediction Markets: ‘You’re Likely to Lose Money’

Australia is reminding the public that prediction markets are not licensed as financial exchanges and that those who utilize such global trading platforms should expect to lose money.

The Australian Securities and Investments Commission (ASIC) operates a website called Moneysmart, an online resource of the Australian Government that helps consumers make informed financial choices. In a notice published on Monday (Aug. 3), Moneysmart highlights the supposed dangers of trading on the outcomes of future events.

At their core, prediction markets facilitate the buying and selling of shares related to future outcomes on an array of commodities and events, including sports. The Moneysmart public service announcement reports that an ASIC review found that 75% of retail traders lost money swapping binary options.

Dire Warning

Moneysmart officials believe trading on prediction markets is not a sound financial undertaking.

“Growing interest in prediction markets overseas, including for entertainment and sports events, has driven increased trading activity and public attention. However, the reality is that you are more likely to lose money than make money,” the website says.

ASIC says prediction market trading comes with various risks, including the fact that most event contracts are “all or nothing,” where one of the outcomes is that you lose your entire investment.

Unlike a commodity position, such as gold, which can fluctuate in value but is highly unlikely to become worthless, a prediction market contract on tomorrow’s high temperature in Sydney has an all-or-nothing outcome. If the specified temperature isn’t reached, the contract expires with no value.

ASIC adds that retail traders could be betting against someone with confidential or inside information. And since no prediction market is licensed to operate in Australia, traders have no protections under Australian financial services laws or government-backed dispute remediation.

Prediction Markets as Investing

Prediction markets claim they allow traders to use their expertise and foresight to their financial advantage. No longer must a person have acumen in a business to make money on Wall Street, as prediction markets allow people to stake supposed investments on everything from whether the Los Angeles Dodgers will win the World Series to who will be the next president of the United States.

The all-or-nothing outcome, however, has generated plenty of critics who say prediction market trading is more closely aligned to betting than investing.

Bank of America warned recently that the rise of prediction markets could lead to increased consumer debt and bad loans, citing data suggesting that only a small number of “whales” profit consistently on the exchanges. The note also raised concerns regarding prediction markets’ “easy access and gamified interfaces that encourage frequent and impulsive wagers.”