Blockchain creates a decentralized prediction market, where the wisdom of crowds predicts the future price and value of cryptocurrencies
A Google search for “predict the price of cryptocurrency” returned nearly 6 million results! I realised that there is a whole industry out there of people with crystal balls, wanting to teach or sell their prediction methodologies.
It’s really difficult to predict the price of Bitcoin and any other cryptocurrency. What method do you use when there is no cashflow, no balance sheet, no revenue and often no product yet?
One methodology that caught my eye was “the wisdom of the crowd”. How could this be used to better predict crypto prices? And what would happen if it could be blockchain-based?
What is “Wisdom of the crowd”?
Investopedia defines it like this:
“Wisdom of crowds is the idea that large groups of people are collectively smarter than even individual experts when it comes to problem solving, decision making, innovating and predicting.”
Apparently the concept can be traced right back to Aristotle, who taught that in setting up a feast, a group of people would come up with a better meal than any individual.
James Surowiecki is a finance journalist. In 2004 he wrote the book “The Wisdom of Crowds” showing how decisions of large groups were superior to individual decisions in areas ranging from pop culture to biology, psychology and economics. There is power in the collective. People are smarter than we think when they act en masse.
In a TED Talk, Surowiecki discusses the power of social media and the “bloggersphere”. The internet is able to harness the “bottom-up, decentralized intelligence” of many people, and voices and opinions can now be heard that were not heard before. And when these views are aggregated, they make sense of the world in a way that was not possible before.
How to put together a wise crowd
Surowiecki warns that the downside is that we can become so enamoured of the internet that we forget that the more linked in we are to a network, the more difficult it becomes to retain our independence. And a group is only smart if individuals within it are independent.
This finding has been borne out by university research. In a study on learning in social networks, the researchers found that not only is uniformity of behavior a strong characteristic of social networks, but also that the speed of convergence is extremely rapid. The initial basis or content becomes very important to later behaviour of the group. Once an idea gets going, it’s easy to have it grow. So-called “herd behaviour” occurs, where everybody chooses the same action regardless of the value of his or her private opinion.
Consensus thinking among people with poor judgement can lead to really poor crowd decisions!
So we need to have a “wise crowd” before we can have any wisdom from it. Some of the characteristics are:
· A diversity of opinions must be reflected
· Individuals must retain their own opinions, and not be influenced by the opinions of others
· Individuals should be able to give their opinion based on their own knowledge
· There must be a mechanism that allows for all ideas to be aggregated into one decision
Crowd behavior and investment markets
Barry Ritholtz is a Bloomberg columnist , founder of a wealth management company and director of an equity research firm. He concurs that a “wise crowd” can make good decisions and that this depends on diversity, aggregation and incentives.
He says that markets are, by definition, a crowd.
“Collectively, all of the decisions made by all of the participants — good, bad or worse; smart, not-so-smart and just plain foolish — add up to the day-to-day trading prices of commodities, bonds, equities, etc.”
However, this is only true for “real” markets which are deep and diverse and trade in trillions of dollars. In his opinion, it does not hold for prediction or futures markets.
Generally the trading is too thin, with too few dollars at risk, and there are too few traders. They lack both the diversity and the incentives needed for a wise crowd.
This last definition sounds a bit like the cryptocurrency market. Is it too small, with comparatively too few traders and too little at risk for it to benefit from collective wisdom in deciding on prices and the real value of cryptocurrencies?
What would be the solution to this?
Decentralized prediction markets
Traditional prediction markets gather public opinion based on bets made by users. Typically, they ask questions such as “Who will win the presidential election?” and users will bet against each other. Money is the proof-of-stake in this system. The purpose is to aggregate popular beliefs about the outcome of an event. There are limitations on the types of topics that can be covered so as not to fall foul of betting laws in various jurisdictions.
A new development, and one that may be very useful for predicting crypto prices is decentralized prediction markets. They are built on a decentralized blockchain ledger, with no single authority. Users can create bets on any topic they want to and are not limited to those defined in the more traditional prediction markets. They are also not geographically limited, so a more global — and therefore diverse — view is more likely. Their decentralized nature also makes them more fraud-proof.
Blockchain and crypto enthusiasts will be the most likely people to use these platforms, so they are likely to be relatively well-informed about crypto in general and perhaps trading in particular. There is also financial incentive for people to share their informed predictions. This is likely to result in more accurate results.
In this system the odds of winning are dynamic, as users “stake” the outcome that they believe will be the final outcome.
Decentralized prediction markets meet all the requirements for putting together a “wise” or smart crowd:
· A diversity of opinions from different countries and cultures can be collected
· Individuals are anonymous, so are more likely to give their own opinions, rather than try to fit in with, or be biased by, others
· There is a monetary incentive that will ensure that individuals apply their minds and their knowledge to their opinions and bets
· Platforms are being set up to collect and aggregate all the ideas.
Blockchain platforms for decentralized prediction markets
Companies offering platforms for general predictions
Some companies that have established platforms for decentralized prediction markets include
Augur, Stox and Gnosis are Ethereum-based, and market contracts or bets are administered as smart contracts. Bodhi runs on the QTUM blockchain. It is one of the biggest Dapps on QTUM and has the additional benefit of being mobile-compatible.
Some of the features on these platforms are similar:
· On all of them users can make predictions on already existing topics (eg the results of various soccer games) or they can create their own topics.
· All of them have their own cryptocurrency to be used for transactions on their platforms: REP for Augur, GNO and OWL for Gnosis, STX for Stox and QTUM and BOT for Bodhi.
· They have slightly different mechanisms, but all use and reward oracles for setting up the bets and deciding on outcomes.
· Most of them have created quite clever computations that offer better returns on bets than traditional prediction markets do.
At the end of the day, it is possible to make some money just for offering your opinion on an issue. This may include your opinion on the price of a cryptocurrency.
Companies specifically aimed at predicting crypto prices
KryptoLoop has the specific goal of predicting the price of cryptocurrencies. The purpose is to leverage the crowd’s forecasts to drive better investment returns.
They ask these questions on their website:
What do you think Bitcoin [or enter CryptoToken here] will be priced at
· next week
· end of the month
· end of the year
What is your trade recommendation for [enter token name here]?
Once you have provided your opinion, you can see what others have said, and you have the chance to adjust your prediction if you want to.
According to Igor Feerer, “super forecaster” at KryptoLoop,
“Through the “wisdom of the crowds” model we get a freakishly close forecast and are able to let our users keep their finger on the pulse of the crypto-economy.”
Using blockchain platforms to predict the crypto price
This is a new industry, using new technology, with new platforms introducing new cryptocurrencies of their own into the market. It is still “baby steps” time.
There is also the risk of increased regulation. Many governments see prediction markets either as gambling or as options trading — both heavily regulated areas. Despite this, any system that is truly decentralized and dealing in cryptocurrencies cannot actually be taken down.
If you believe in the wisdom of the crowd, decentralized prediction markets are probably the best way to predict future prices and values of cryptocurrencies.