Prediction markets (also known as betting exchanges) are marketplaces where users trade bets against each other. They are vastly different from traditional bookmakers in which bettors place bets against “the house”.

These markets are often settled daily and have lots of volatility, making them the ideal environment for sophisticated traders. However, traders have not been able to take advantage of these opportunities as most betting has historically been done through traditional bookmakers that charge high fees, limit liquidity, and censor winning bettors.

New blockchain-based prediction markets like Augur and SportX change this by lowering transaction costs and aggregating global liquidity.

Simple Arbitrage

Bettors and bookmakers react to information at differing speeds. This difference in speed means that the bets being offered on different betting platforms are not always synced up.

Arbitrage opportunities arise due to the mismatch in information diffusion.

Arbitrage is a simple trading strategy that allows users to generate risk-free profit by taking advantage of pricing mismatches to guarantee a profit regardless of the outcome.

For example, let’s say in a NBA game between the Toronto Raptors and Milwaukee Bucks the best odds on Bet365 and SportX are:

The arbitrageur would bet on the Raptors on Bet365 and the Bucks on SportX.

As we can see, the odds between Bet365 and SportX are different. This could be for a variety of reasons: an injury has been announced that has yet to be reflected in one of the platforms, SportX users are more bullish on the Raptors and have driven down the price, etc.

Betting exchanges often have tighter odds as competition between bookmakers leads to more competitive bet offers.

Regardless of the reasons, an arbitrage trader can now lock in a guaranteed profit by betting $95 on the Toronto Raptors on Bet365 at 2.20/+120 and betting $110 on the Milwaukee Bucks at 1.90/-111 on SportX.

Doing this would lock in a guaranteed $4 profit no matter the outcome:

If Raptors win: $95 bet returns $114 of profit, minus $110 bet loss = +$4

If Bucks win: $110 bet returns $99 of profit, minus $95 bet loss = +$4

Risks & Limitations

⏳ Speed

Betting websites constantly monitor competitors to ensure that odds are not out of line, which means that arbs are typically only available for short periods of time. To take advantage of differentials between bookmakers and SportX, trades must be completed quickly before the market corrects itself.

SportX has an open API that makes it easy for traders to send multiple orders to the exchange instantaneously. Please contact us for access.

💧 Liquidity

Liquidity describes the ease and cost by which a user can enter into and out of positions on a market. Lack of liquidity can be a problem for arbitragers, particularly in less popular markets.

Insufficient liquidity prevents the arbitrager from completing the arb, meaning they would now have action on a bet they might not particularly be interested in having. To combat this, SportX has cultivated a network of market makers to ensure there is always liquidity.

🔐 Custodial Risk

Arbitrage betting requires having cash on multiple betting websites at once in order to take advantage of discrepancies across them. This exposes the trader to increased counterparty risk as each website may have differing withdrawal and security procedures that can jeopardize the trader’s cash.

This doesn’t apply to SportX as it is non-custodial, which means that users control their funds.

Conclusion

Prediction market arbitrage is the holy grail of trading; it’s quite literally guaranteed profit. However, it is still a tricky strategy that requires you to monitor many different markets at once in order to take advantage of opportunities that arise before others do.

It’s likely that arbitrage opportunities are more likely to occur in less mature markets like SportX given that they’re so much competition for them on mature markets.

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Disclaimer: The information contained in this document is not (and should not be construed as) investment advice or a solicitation. The information is not necessarily verified nor is it provided under any sort of warranty, including as to completeness or accuracy. The information is subject to change without notice. Trading prediction markets or digital assets is volatile and risky: recipients of this information should do their own due diligence, considering their specific financial circumstances, investment objectives, capabilities, and risk tolerance, before taking any action. This information does not constitute an offer to buy or sell any of the assets referenced herein.