Nascent prediction markets like Polymarket currently offer arbitrage opportunities for sophisticated investors. And capitalizing on them doesn’t just generate profits—it helps add liquidity and make the market more efficient.
Here are three simple strategies to take advantage of pricing inefficiencies and generate excess returns.
1. Buy Guaranteed Outcomes at a 2-3% Discount
Sometimes, traders want to exit their guaranteed “yes” or “no” positions at a slight discount, simply because they don’t want to wait a few days for settlement.
This happens because people value liquidity—they want to free up capital to place the next bet.
- These positions are effectively risk-free, and you can often pick them up at a 2-3% discount by providing liquidity to impatient traders.
- If the market resolves in just a few days, this can translate to an extremely high annualized return.
2. “No” Bets Are Underpriced
Most participants on Polymarket are gamblers, not investors—which leads to significant overpricing of “yes” bets.
- When you bet “no,” you’re often taking the other side of an overenthusiastic gambler, rather than playing against a rational market.
- This makes “no” bets in certain markets behave similarly to bonds: steady returns, relatively low risk.
- You can frequently find bets with 3-5%+ returns resolving in 2-3 months—which can translate into an impressive 15-20% annualized return on capital.
3. Exploit Pricing Inefficiencies in Similar Markets
Polymarket often lists multiple markets tied to the same or highly related events.
- Sometimes, one market might price an outcome at 80% likelihood, while another prices the opposite outcome at 30%.
- There can be good reasons for this (differences in wording, alternative resolution conditions), but more often than you’d expect, it’s just mispriced.
- If you’re diligent, these inconsistencies can create low-risk arbitrage opportunities where you can bet both sides and lock in free profit.
I’m not sure how long these opportunities will last – surely these prediction markets will become more efficient as smart money floods in.