Prediction Markets, Hayek, and…SpaceX?

Prediction Markets

Prediction markets facilitate price discovery. They do this in three ways: incentivizing truth-telling, promoting information discovery, and aggregating information. This is the single most important net positive that prediction markets provide to the broader financial system. To be clear, the net positive is for markets, not for “society.” Now, we can have live, highly-accurate market expectations of U.S. GDP growth on an annual and quarterly frequency and the next CPI print. It also means we have the market’s best guess of what Anthropic’s IPO closing market cap will be.

Prediction markets have flowered at a good time. The last decade has seen the rise of the retail investor. A generation priced out of traditional wealth-building vehicles has turned to financial markets as the primary mechanism to accumulate capital. Millennials and Gen Z are not homeowners, they’re DIY day traders. Innovation has sprung up to meet this new demand. Robinhood, Kalshi, Polymarket—success after success after success. Now, hundreds of millions of new users, facilitating trillions of dollars in daily volume, command the attention of global finance.

The numbers tell the story: 54% of Gen Z started trading by age 21; 94% of Gen Z and Millennials are interested in tangible assets and collectibles; 31% of the portfolios of younger investors have alternatives or crypto exposure (compared to 6% of older investors); and, 41% of Gen Z and Millennials would let AI manage their investments.

These retail investors, by and large, have flocked to prediction markets. While “they’re just a work-around for state gambling laws” is still the dominant narrative and the primary source of Kalshi and Polymarket’s revenue, things might be shifting.

And if they do, they’ll shift towards economically beneficial products, meaning prediction markets on U.S. macroeconomic indicators will not only grow, they’ll be supplemented by others (we’re already seeing this in the form of GDP prediction markets for an increasingly large contingent of countries). This is the promise of prediction markets. This is their future.

Hayek

It’s worth pausing to consider in more detail the ways in which the expansion of participation in financial markets and the rise of prediction markets produces tangible benefits for price discovery. The goal of any financial market is to accurately discover the “true” price of assets through the synthesis of information. But, all economic systems operate in a state of incomplete information. Or, at least, information that is not centralized in anything close to its totality. Further, information is not always aggregated efficiently, and incentives don’t always exist to seek out that information.

In fact, some of the greatest contributions to 20th century Economics literature were a string of articles by Friedrich Hayek on the strength of Capitalism in operating under such circumstances and with such constraints: “The Use of Knowledge in Society,” “Competition as a Discovery Procedure,” and “The Meaning of Competition,” are a masterful articulation of the nature of information and the role of markets in discovering prices. Put simply, we all know different things and accurate pricing benefits from incorporating as much of this information as possible.

With the expansion of participation in markets to retail, more information is synthesized, meaning prices more accurately reflect the market’s “true” value of the underlying asset. This holds even if some traders are “uninformed” or “unsophisticated.”

With the rise of prediction markets, markets can more effectively aggregate information and can express views on a wider range of questions under market conditions. It’s the innovation of a fungible product (an event contract) targeted at a specific question (What is the chance of X) that makes prediction markets shine in this regard. Lastly, prediction markets also provide incentives for “finding” information.

SpaceX?

So how does SpaceX fit into this?

Before SpaceX went public, Hyperliquid famously offered a perp product for the company. Much has been made on the twitterverse about Hyperliquid’s pinpoint accuracy in predicting the SpaceX IPO price. Though I’ve seen it described as remarkable, novel, mindblowing, etc. etc. etc., it’s actually just one example of what broad-based participation in financial markets produces.

At Mecone, for the record, we weren’t at all surprised by it, but we did think about it slightly differently from most of what we saw online.

It wasn’t Hyperliquid predicting the exact price. Instead, it was the market on Hyperliquid incorporating the most information. More information equals better pricing. Perps, with all their volume, with retail participation, with 24/7 markets, with deep liquidity, provide a superior solution to what Hayek eloquently described: the core problem at the heart of economic society is “the utilization of knowledge not given to anyone in its totality.”

Retail now constitutes a meaningful constituency in financial markets; Perps, thanks to their simplicity, appeal to this group of traders; as a result, Perps incorporate the disparate information known by millions of anonymous people around the world and previously unknown to markets, allowing for more accurate pricing and the greater utilization of knowledge. This, in turn, gave us the seemingly magic Hyperliquid moment.

But there’s a problem (there’s always a problem). The SpaceX pre-IPO oracle used a self-referential methodology. While, around the time SpaceX went public, this wasn’t a problem, a self-referential methodology obviously can’t sustain credibility and legitimacy in the long-run: because the Perp’s trading price partially informed the oracle price, it created a loop with no independent anchor, making the Perp prone to a structural directional bias. Not good.

What if you could use prediction markets, with their accurate pricing, to construct the oracle? That way, it wouldn’t be self-referential; it would actually conform to standards across financial markets: the oracle would be based on transactions in one market and allow trading in another (linked but separate) market. This is the foundation of the modern financial system. Mecone brings it to illiquid assets.

@meconemarkets