Donald Trump Futures, Cryptocurrency, and a Potential Trading Revolution

Platform Augur could revolutionize a whole lot of everything, including the way we trade

Aug 18, 2015 at 9:42 AM
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    Whole lotta buzz this past week about a new site set to hit the interwebs this fall or winter. This, from Reason: 

    "An online gambling platform could do to the neighborhood bookie what electric refrigerators did to the ice delivery man. 

    Coming this fall, Augur will allow participants to wager money on any future event of their choosing. Software will set the odds, collect the bets, and disperse the winnings. The price alone should give Nevada sportsbook operators pause; an estimated one percent of every pot will go to keep the system running. The average vig today is about 10 times that." 

    Here's the thing, though: It's way more than that. Think sportsbook meets Intrade meets cryptocurrency.

    Ultimate success is far from guaranteed, but it has the potential to revolutionize a whole lot of everything, including the way we trade. Let me try to explain as best I can.

    Augur is more like Intrade than anything else. Intrade gained notoriety as the go-to "Prediction Market" for the media. It lists all sorts of markets, but the ones that really caught on were the de facto political futures. The working theory was the Wisdom of Crowds. Standard polls could tell you one thing, but since Intrade gauged real-money "betting" with their feet, it was supposed to give a better picture of the odds on political races. 

    It "failed" for a couple of reasons. One, since it was essentially gambling, it ran afoul of U.S. laws. Two, the "predictions" weren't particularly great, as many discovered it was very inexpensive to buy "narrative." By that I mean someone or something working to benefit Candidate X could go overpay for Candidate X Futures and then call up CNN and say "Hey, look at that momentum for Candidate X! The crowds must know something!" The markets were relatively small, thus it was a great way to spend some campaign dollars.

    So, why will Augur succeed where Intrade failed? Well, for one thing, it's completely decentralized. 

    There's no home site creating the "markets." All the markets will be user-generated. In other words, if you want to create and make markets in a Donald Trump future, you can create a Donald Trump future. In fact, you are incentivized to create popular markets in the form of those 1% "rakes." Plus, there's no centralized body even ruling on which side "wins" a given bet. Rather, it will be judged by what Augur calls Rep holders. Reps will also earn a commission, based on activity and merit. Augur just started a Rep crowdsale today, in fact. 

    For another thing, it's not going to rely on credit cards for funding accounts. Rather Augur will use a cryptocurrency known as "Etherium" (I'm going to have to defer on explaining this one; best I can understand, it's a next-generation offshoot of Bitcoin). The major plus side is that cryptocurrencies are utterly borderless and thus not subject to, say, the U.S. telling Visa Inc (NYSE:V) it risks punishment for processing transactions. 

    Throw it all together, and by all appearances it looks like an amorphous workaround of U.S. gambling laws. If it takes off and does in fact avoid litigation -- both big
    ifs -- it could have a revolutionary impact. Casinos aren't going to cotton to potentially losing a good share of the "outside Nevada" market. And sports leagues are going to have to wake up and do … something. 

    Right now, sports league strategy seems to slow-play as best they can in order to keep the status quo as long as they can. They all love the added eyeballs thanks to interest generated by sports betting; they just want a way for someone to Show Them the Money. They've figured it out in Daily Fantasy with all those FanDuel and DraftKings, but not so much with the casinos. The NBA, to its credit, sees the writing on the wall and is moving towards supporting legalization. The NFL continues to throw up every obstruction it can. Its tune will wildly change if Augur, or something like it, takes off. 

    Disclaimer: Mr. Warner's opinions expressed above do not necessarily represent the views of Schaeffer's Investment Research.


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