Augur Trading Insights
I recently launched a free monthly newsletter that shares ideas on trading strategy for Augur and other prediction markets. Below is an excerpt from the first edition.
First though, a quick word of caution: both trading on Augur and holding Ether, which is required to trade on Augur at this point, entail risk. I’m not an expert or anything close, these are just my personal opinions as someone who spends a lot of time thinking about crypto, prediction markets, and trading.
Lagging Order Books
Earlier this month we saw something interesting happen: an acute drop in crypto prices in tandem with sky-high gas prices on Ethereum. Since one must pay gas to remove orders on Augur, outdated (read bargain) prices lingered on the order books. This created some great opportunities for relatively high conviction, high volume trades.
For example, when REP was falling like a brick down past the mid to low 20s with no short-term catalysts for reversal in sight, there were still buy orders on the book for over a 50% chance that REP would exceed $30 at month’s end. What a great selling opportunity!
The takeaway is that when gas prices are unusually high, keep an eye out for lingering bargains, especially if the broader crypto market is dropping at the same time.
Markets to Keep an Eye On
I’ve written before about how Augur traders are by self-selection excessively bullish on crypto, especially REP and ETH (since Augur is built on Ethereum):
“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.”
But this effect can be offset by periods of excessive bearishness in crypto prices. In particular, the ETH/BTC ratio has recently rolled over in a big way and Augur is starting to get overly bearish on this ratio in my view. So in the next few months, keep an eye on markets predicting the long-term ETH/BTC ratio.
When you make a trade on Augur, it’s not just about the end outcome but about how things will trend. For instance, even if you think BTC’s market cap will be higher than ETH’s at the end of ’19, you might buy shares predicting ETH will be higher if you expect it to shoot up at some point in the interim allowing you to get out at a higher price.
Crypto is still a young volatile market and Ether has many medium-term catalysts that could lead to upswings in the ratio. More broadly, we’ll likely see, if not a reversal of this bear market, at least significant bounces in crypto during the next year. During bearish times, BTC dominance tends to go up and likewise, we can expect ETH/BTC to surge during bullish stretches.
Moving outside crypto, if you’ve been watching the broader markets, you’ll know gold hasn’t fared much better than Bitcoin this year. Gold has steadily fallen this year and this past month, amid turkey’s Lira crisis and general skittishness with emerging markets, global investors took shelter in the USD rather than gold, which historically serves as a safe haven in times of instability.
The Gold to S&P 500 ratio recently hit a 10 year low and according to Gluskin Sheff Research, speculative long positions in gold recently hit their lowest in two decades. In the ten times when this level has occurred, gold was never down 3 months later and was on average up by 10%.
As a wise investor once put it, “If everybody’s optimistic, who is left to buy? If everybody’s pessimistic, who’s left to sell?” In other words, if everyone who wants to short something has already placed their bets then it’s probably time to go long as there’s nobody left to exert downward pressure.
Augur markets may be further biased against gold since many folks in crypto foresee a future where ‘digital gold’ dethrones the yellow metal as the world’s premier store of value. While I think this will happen someday, I don’t see this happening anytime soon.
For more in-depth insights on trading on Augur and other prediction markets, sign up for my monthly newsletter, The Augur Edge.