Small Group of Traders Drives Polymarket Prices, Study Finds
A new academic working paper analyzing trading activity on Polymarket from 2023 to 2025 finds that a small minority of participants are responsible for most price discovery, raising questions about the widely held belief that prediction markets derive accuracy from the collective intelligence of crowds.
The study, authored by researchers from London Business School and Yale University, examined 1.72 million trading accounts and $13.76 billion in volume. It concludes that roughly 3% of traders account for the majority of price movements toward correct outcomes, while the remaining 97% primarily provide liquidity and trading volume without consistently contributing to accuracy.
According to the findings, these informed traders repeatedly position themselves on the correct side of markets and adjust prices as new information emerges. In contrast, the broader base of participants tends to lose money in aggregate, effectively transferring value to the more informed minority.
Distinguishing Skill From Luck
A central challenge in evaluating trader performance is separating genuine skill from statistical randomness, particularly in a market with more than 1 million participants.
To address this, the researchers simulated each trader’s activity 10,000 times using identical market conditions, trade timing and position sizes, but replacing trade direction with a random coin flip. This created a benchmark for expected performance in the absence of informational advantage.
Traders whose actual performance consistently exceeded the simulated results were classified as skilled, while others were categorized as benefiting from luck.
The results show that among the largest winners by raw profit, only 12% demonstrated consistent outperformance relative to the benchmark. The remaining majority appeared to benefit from chance rather than predictive ability.
Further testing reinforced this conclusion. When performance was evaluated across separate sets of events, approximately 60% of those identified as “lucky winners” failed to sustain gains and instead recorded losses, indicating a lack of repeatable edge.
Impact on Market Accuracy
Despite their small number, skilled traders play a disproportionate role in improving market accuracy.
The study finds that when these participants represent a larger share of trading activity, prices move closer to correct outcomes, particularly in the final stages before event resolution. These traders are also faster to respond to new information, adjusting positions in reaction to developments such as central bank announcements or corporate earnings reports.
By contrast, the broader group of traders shows limited and inconsistent responsiveness to new data, reinforcing the idea that most price discovery originates from a concentrated subset of market participants.
Insider Trading Risks Highlighted
The findings also raise concerns about the role of non-public information in prediction markets.
Both Polymarket and Kalshi prohibit trading on insider information. However, the study highlights cases where trading patterns appear unusually aligned with subsequent outcomes.
One example cited is a contract tied to the potential removal of Nicolás Maduro from power in January. In the days leading up to the event, three newly created accounts accumulated large positions while the market probability remained near 10%.
These accounts placed orders involving tens of thousands of shares before the price adjusted. Following the event, they reportedly generated more than $630,000 in profits. Two of the accounts ceased trading shortly afterward, while the third became largely inactive. The study does not present evidence of wrongdoing but identifies the pattern as consistent with informed trading behavior.
The researchers note that trades based on non-public information, when they occur, tend to move prices significantly more than typical activity—estimated at 7 to 12 times the impact per dollar compared to standard skilled trades. However, such cases appear to be relatively rare and concentrated in specific events.
Implications for Prediction Markets
The study challenges a central assumption underpinning prediction markets: that their accuracy arises from aggregating diverse and independent viewpoints.
Instead, the evidence suggests that accuracy depends heavily on a relatively small group of repeat participants who consistently outperform others. The broader market plays a supporting role by providing liquidity, but does not collectively contribute to price efficiency in the way commonly assumed.
While prediction markets may still offer valuable signals, the findings indicate that their effectiveness is driven less by crowd intelligence and more by the presence of informed traders capable of interpreting and acting on information ahead of others.
Analysis: Prediction Markets Don’t Run on Crowds — They Run on a Tiny, Informed Minority
The “wisdom of the crowd” narrative sounds clean.
It’s also mostly wrong.
When I went through the data from Polymarket, one number kept sticking: 3%.
That’s the share of traders actually moving prices toward reality.
Not 30%. Not even 10%.
Three.
The Crowd Isn’t Smart — It’s Liquidity
Let’s kill the myth directly.
The crowd isn’t predicting anything. It’s funding the game.
97% of traders? They’re not discovering price. They’re reacting to it, late, inconsistent, and usually wrong.
They provide volume. They make the charts look active. They give the illusion of a functioning market.
But in aggregate?
They lose.
And not randomly — systematically. Their losses are the other side of someone else’s edge.
I’ve Seen This Structure Before
This isn’t unique to prediction markets.
Same pattern shows up in:
- Perps trading
- Meme coins
- Low-cap alt rotations
A small group understands the game.
Everyone else chases it.
And the money flows one way.
The Skill vs Luck Filter — This Part Is Brutal
The researchers didn’t just look at profits.
They stress-tested them.
10,000 simulations per trader. Same trades. Same timing. Same size.
Only change?
Direction decided by a coin flip.
That’s savage.
Because it strips away narrative. No “I had a thesis.” No “I read the market right.”
Just: would you have made money if you flipped a coin?
Turns out most “winners” wouldn’t.
Only 12% Are Actually Good
Among the biggest profit-makers, only 12% beat randomness.
That’s it.
The rest?
Noise.
And it gets worse.
60% of so-called winners flip into losers when tested on different events.
That’s not edge.
That’s variance catching up.
The Timing Edge Is Everything
Here’s where it gets interesting.
The skilled traders don’t just pick the right outcome.
They move early.
They react first when new information hits.
Fed decision? They’re already positioned.
Earnings surprise? They’ve adjusted before the crowd processes it.
Everyone else?
Still reading headlines.
The Maduro Trade — This One Feels Off
This example stood out.
A market pricing a 10% chance of Nicolás Maduro being removed.
Then three brand new accounts come in.
Size up. Hard.
Tens of thousands of shares. Before the price moves.
Then the event happens.
They walk away with $630,000.
And then… they disappear.
No activity. No follow-up trades. Just gone.
I’m Not Saying It’s Insider — But Come On
There’s no confirmed wrongdoing.
Fine.
But behavior matters more than labels.
New accounts.
Large size.
Perfect timing.
Immediate exit.
I’ve seen enough markets to know when something smells off.
Insider Trades Hit Different
According to the paper, insider-style trades move prices 7x to 12x more per dollar.
That’s massive.
Because they’re not guessing. They’re acting on certainty.
And even if they’re rare, they distort the system when they happen.
So What Actually Makes These Markets Work?
Not the crowd.
Not volume.
Not diversity of opinion.
It’s repetition.
A small group of traders who:
- Show up consistently
- Have an edge
- Act faster than everyone else
That’s the engine.
Everything else is fuel.
The Uncomfortable Truth
Prediction markets aren’t democratic.
They’re asymmetric.
A few people understand what’s happening.
Most people don’t.
And the system still works — not because everyone is right, but because the right people are active enough to push prices into place.
What I’d Do Here
If you’re trading these markets thinking you’re part of the “crowd intelligence,” you’re already behind.
You’re not the signal.
You’re the liquidity.
The only way this works in your favor is if you:
- Identify who the informed players are
- Track how they position
- Stop pretending equal participation means equal insight
Because it doesn’t.
The Only Take That Matters
Prediction markets don’t reward participation.
They reward information.
And most people don’t have it.
Disclaimer
This article is for informational and educational purposes only and does not constitute financial, investment, trading, or legal advice. Cryptocurrencies, memecoins, and prediction-market positions are highly speculative and involve significant risk, including the potential loss of all capital.
The analysis presented reflects the author’s opinion at the time of writing and is based on publicly available information, on-chain data, and market observations, which may change without notice. No representation or warranty is made regarding accuracy, completeness, or future performance.
Readers are solely responsible for their investment decisions and should conduct their own independent research and consult a qualified financial professional before engaging in any trading or betting activity. The author and publisher hold no responsibility for any financial losses incurred.