Prediction Markets 101 for Global Trade

What Are Prediction Markets?

Prediction markets allow participants to buy and sell contracts whose payouts depend on future events. Unlike traditional financial markets trading ownership (stocks) or obligations (bonds), prediction markets trade probabilities.

When you buy a "YES" share in "Will the Port of Los Angeles handle over 900,000 TEUs in December 2024?", you're expressing a probabilistic view. If the event occurs, your share pays $1. If not, it expires worthless. The current market price—say $0.65—represents the crowd's aggregate probability: 65% chance of YES.

Key Principle: Market prices reveal what traders collectively believe will happen. Well-functioning prediction markets often outperform expert forecasts because they aggregate diverse information sources and create incentives for accuracy.

Why Prediction Markets for Global Trade?

Global trade operates through measurable, verifiable outcomes:

These transparent data sources enable objective resolution—no subjective judgment required. When December ends, Port of Los Angeles publishes TEU volume. The market resolves automatically.

For Traders:

For Analysts:

Binary Markets: YES or NO

Binary markets offer two outcomes: YES or NO (event occurs or doesn't).

Example: "Will Suez Canal monthly transits exceed 1,800 vessels in January 2025?"

Interpreting Prices:

Trading Logic:

Risk/Reward:

Scalar Markets: Ranges and Indices

Scalar markets trade outcomes across a continuous range, not binary YES/NO.

Example: "Port of Los Angeles Monthly TEU Throughput Index — December 2024"

Market Mechanics: Instead of single YES/NO, scalar markets have multiple outcome tokens:

Example Pricing: | Bucket | Price | Implied Probability | |--------|-------|---------------------| | 0-50 | $0.02 | 2% | | 50-75 | $0.08 | 8% | | 75-100 | $0.25 | 25% | | 100-125| $0.50 | 50% | | 125-150| $0.15 | 15% |

Trading Strategy:

Advantages Over Binary:

Index Markets: Composite Exposure

Index markets combine multiple underlying metrics into single contract.

Example: "Trans-Pacific Supply Chain Index — Q4 2024" Components:

Each component contributes to index value. Resolution aggregates weighted outcomes.

Use Cases:

  1. Holistic supply chain view: One position captures end-to-end risks
  2. Diversification: Reduces single-point exposure (e.g., just LA Port congestion)
  3. Hedging: Match index to your business footprint (importer using LA, Shanghai, Panama)

Calculating Index: If LA hits 110, Panama 85, Shanghai 105, freight rates 120: Index = (110 × 0.40) + (85 × 0.20) + (105 × 0.25) + (120 × 0.15) = 106.25

Trading Index vs Components:

How Odds Translate to Probability

Prediction market prices are probabilities in decimal form:

| Market Price | Implied Probability | Fractional Odds Equivalent | |--------------|---------------------|----------------------------| | $0.10 | 10% | 9-to-1 against | | $0.25 | 25% | 3-to-1 against | | $0.50 | 50% | Even odds | | $0.75 | 75% | 3-to-1 in favor | | $0.90 | 90% | 9-to-1 in favor |

Expected Value Calculation: Buy YES at $0.40. You believe true probability is 55%.

When to Trade: Only when your probability estimate differs significantly from market price. If market is $0.40 and you think 42%, edge is too small (transaction costs, uncertainty).

Market Makers and Liquidity

Automated Market Makers (AMM): Ballast uses AMMs to provide continuous liquidity. You can always buy or sell, but prices adjust:

Example:

Trading Large Size: AMMs have pricing curves. Buying 10,000 shares moves price more than buying 100 shares. Check liquidity depth before trading.

Exercise: Calculate Implied Probability

Scenario: "Will Shanghai Port handle over 4.3 million TEUs in November 2024?"

Questions:

  1. What is the market's implied probability of YES?
  2. If you buy 100 YES shares at $0.72, what's your max profit if event occurs?
  3. What's your max loss if event doesn't occur?
  4. What probability do you need to believe for this trade to have positive expected value?

Answers:

  1. 72% implied probability
  2. Max profit: 100 shares × ($1.00 - $0.72) = $28
  3. Max loss: 100 shares × $0.72 = $72
  4. Need to believe actual probability > 72% (e.g., 75%+) for positive expected value

Common Pitfalls

1. Confusing Price with Probability Market price $0.80 doesn't mean "80% certain"—it means market participants collectively price it at 80% likely. They could be wrong.

2. Ignoring Resolution Sources Always check how the market resolves. "Port congestion" is vague. "Average dwell time over 5 days per IMF PortWatch weekly data" is specific and verifiable.

3. Overtrading Small Edges If market is $0.50 and you think 52%, your edge is tiny. Spreads and fees eat profits. Wait for significant mispricings (10+ percentage point differences).

4. Not Accounting for Timing Binary markets require event to occur by deadline. You might be right directionally but wrong on timing. "Will LA Port exceed 900k TEUs in December?" vs "Will it ever exceed 900k TEUs?" are different bets.

5. Neglecting Correlation If you're long Suez Canal transits AND long European port capacity, you have correlated positions. Both lose if Red Sea attacks persist. Diversify across uncorrelated risks.

Ready to Apply What You've Learned?

Turn knowledge into action.

Start Trading on Ballast Markets →

Use prediction markets to apply the concepts from this learning module. Trade real contracts based on port volumes, shipping delays, chokepoint transits, and tariff impacts.

Next Steps

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Practice:

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Disclaimer

This content is for educational purposes only and does not constitute financial advice. Prediction markets involve risk, and outcomes may differ from expectations. Start with small positions and only risk capital you can afford to lose.