How predicting markets helps understanding them
Executive summary:
- Prediction markets based on blockchain technology are a useful tool for every (future) trader
- They benefit both, the estimator who can earn money and monitor his performance and the trader who gets additional information for his investment decisions
- Being successful in the prediction markets requires constantly monitoring and improving your skills
Two years ago I decided to invest in cryptocurrencies. I was curious about the idea of money not backed by central authorities (and always a small tech nerd). Numerous opportunities developed on the WWW to buy and sell things using these assets. Back those days it was mostly about bitcoin but other tokens already existed like ETH, XRP and XMR to name just a few. The price of those tokens was far below their current price levels. Trading platforms like Poloniex and Kraken dominated the exchange space. I call this the “time of hope” since many projects had good ideas but whether they will ever deliver what they promise and how the markets accept their idea was unclear. With the current discussion on regulation and taxation things have become even more difficult.
Having experience in stock and forex markets I thought I could apply the same techniques for forecasting price trends in crypto. As usual, I spotted MACD and RSI indicator trends and drew a lot of lines along the price curves. It turned out I was wrong. From mid-2016 till today I went on a rollercoaster ride seeing many of my predictions fail (but still have a win up to today! -> pure luck). Coming from stock and forex markets I wasn’t experienced in how new technology investment patterns work and their enormous volatility. You rarely see a stock change its value 50% a day, in crypto 20% change where and still are seen as “normal”.
Exploring the crypto universe I ran into different ICOs that interested me. As you might know it turned out that bitcoin’s database technology (the blockchain) can be used far beyond value transfer. With ETH smart contracts were introduced which opened a new universe of opportunities for many different types of applications.
Prediction markets on the blockchain
Mid of August 2017 I first read about the idea of Cindicator (CND), a platform you get access to trading forecasts by buying a certain amount of their tokens. The predictions are made by members of the platform (not necessarily token holders) who get a monthly payment based on the accuracy of their predictions. The results are announced through their Telegram bot. The idea is based on the concept of the “wisdom of the crowd”. Since most markets not only follow the laws of offer and demand but rely a lot on psychological moods of their participants. Everybody involved in trading will be well aware of those concepts and has probably experienced unforeseeable market moves “out of nowhere”. “Wisdom of the crowd” is a concept, beneath others, to catch such market moves early to react. I immediately liked the idea and signed up as a forecaster in December 2017.
Improving your skills by monitoring your performance
Making predictions on the platform is straightforward. You sign up, go to the forecasting section and you see all open future questions. You can also go to the past and see the questions you answered, the correct and incorrect ones. With each question there comes some link(s) with useful information relating to the event in question.
The good thing of being a Cindicator forecaster — you can only win (as long as you don’t consider time for market research a loss). When I started predicting last year I ended up with extremely bad results. At first I thought about giving up (who would have imagined such a bull run?) but having read Alexander Elder’s “Come into my trading room” changed my mind. I thought I had to figure out why I messed up so badly and what I need to change to become more accurate.
To cite Elder, the most important thing of a successful trader (and this applies also to predictors) is an accurate trading record. That’s easy one might think, but in reality it is a difficult and time consuming task to document all the decisions involved why you decided for a certain event to be likely or unlikely to happen. Prediction platforms have the great benefit that they track your success. Below I describe my experience with the Cindicator platform.
When I stared making predictions, I always answered the Good/Bad questions with 0% or 100%. When I was right I received 50 points, otherwise I lost 50 points. It turned out that strategy was not working. My false predictions outnumbered the correct ones (by far). So what to do about it? I took another parameter into account: The level of my confidence. Doing so gives me much better results than going all in. In the beginning it is difficult to understand the concept of being only 68% correct (or 32% incorrect to flip the coin) but it was exactly the turning point for me.
In another category of questions you need to predict the price level of a certain assets within a certain time period. I turned out I was quite good here in Forex markets. This was mainly because I was experienced with the volatility and price moves in this asset type. With crypto it was horrible in the beginning. I was sometimes completely out of the range ending up with a huge loss. Again I analyzed what went wrong and started to investigate past price moves, volatility levels and trends. I have improved in predicting price levels on a daily bases for crypto, nevertheless I decided not to make forecasts for weekly levels since I never really manage to estimate the range correctly. I am still trying to figure out why. To predict the price levels I use trading software and indicators on Tradingview, but every other trading platform will do the same job. To me Tradingview is just the most convenient to use and most links from Cindicator questions are routed to Tradingview so having an account there will make things much easier.
The useful thing with prediction platforms (in this case Cindicator) is that you have informative links to potentially interesting articles or other information like charts that come with the question. Whether they provide enough information to base your decision on is up to you. From my experience it is a first start but more detailed investigation should be done if you put more than 10% of your points at risk.
Questions regarding politics (like outcomes on votes) are rather rare but one could make an estimated guess if he is profound in that matter. I rather focus on stock markets, forex, economic benchmarks and of course crypto.
Who profits from the predictions you make?
First of all your skillset and, if you are good, your wallet. The traders, who have to effectively buy the predictions made by the community, are paying for your knowledge. I’m now in the fourth moth in prediction markets and I am very proud that I have managed to get into the top 100 list for traditional markets (Forex, stocks, politics) and top 200 for crypto in the March 2018 challenge leaving me with a prize money of around 20$. Getting into the top 100 gives me access to the trading bot for one month where outcomes of the predictions are published. I only get those indicators since a few days so it’s too early to judge them.
As mentioned above I am also actively trading cryptocurrencies and stocks. I am doing a lot of traditional chart analysis used as the basis for my trading decisions. Here it is real money that is put at risk but I am too lazy to keep an accurate track record, one which the prediction platform offers. This is why I lose money without really knowing why and end up in a situation where I have to rely on hope rather than rational statistics and numbers.
As Elder explains in his book, as soon as you have to rely on hope you will start to loose in the long run and loosing here means loosing cars, houses and vacations on the Maldives. My recommendation for everyone who wants to seriously get into trading is to start with predicting markets. As long as you don’t get into the top 200 in an asset class don’t put your hard earned money at risk. It means you are still on the hope side of the fence. Developing your analytical skills and discipline will help you to jump over that fence and get serious.
How much time does it consume?
If you really want to get into the top 100 list for the month you must make predictions every day. For me this means at least one to two hours each day for analyzing markets, calculating confidence levels and entering the values at the platform. For estimations of the price level it is important to wait as long as possible before the challenge starts to get the most accurate results so mostly at around 7am and 7pm UTC you should have a few minutes to enter the values at the platform.
You can make your estimations through a web browser or via mobile phone app. Unfortunately, I ended up with a Microsoft phone and there is no app provided for this OS. Therefore I always need access to a computer with a web browser.
Registration itself is straightforward and doesn’t consume a lot of time. For payout you only have to provide your public ETH address.
Is it too much or even wasted time? Well, everybody must decide for himself but if I see people scrolling through senseless Facebook pictures the whole day why not use some of this time to think about serious issues and compete in a funny challenge? To me it is much more interesting than social media platforms or watching TV. It is also more exciting than playing online casino games where your odds of winning are low and almost out of your control.
Where to go from here?
My article was only describing one prediction platform, in this case Cindicator. I haven’t explored the market for alternatives since I am quite satisfied with it. It’s advantage is that it is free for those who predict the likelihood of events and it has no annoying ads. Since it is not blockchain-based it should (and up to now has) show the same stability as other comparable platforms and speed is not of an issue here. The platform is still under development, meaning the statistics section is currently not working but planned to be implemented soon. This will give an even better overview of your performance. Maybe in the future you will be able to add notes or screenshots to the questions so it will even be easier to add info’s what you based your decision on.
If you want to become a successful trader (which means one who tracks his trades and makes a few $$ each month), I highly recommend to start predicting at a prediction platform like Cindicator. Try it for a few months and see whether you have the discipline and time to become an accurate forecaster. If not, put your money in a pension fund or give it to a professional financial advisor. Sometimes you might be lucky making a good estimated guess on a certain asset and having a win but in the long term that will leave you with a loss and you will start becoming like a gambler who just believes in his next bet. A trader still needs more skills than a forecaster, but you will learn to estimate price levels, judge your confidence and, if you’re good enough, earn some motivating prize money.
