Prediction markets badly mispriced Brazil's presidential election, with Polymarket—a crypto-based prediction market where traders buy and sell contracts tied to real-world outcomes—giving Luiz Inácio Lula da Silva only about a 20% chance of winning shortly before he defeated right-wing rival Flávio Bolsonaro to secure a fourth term in office.

Traders and analysts who spoke with Decrypt pointed to a combination of factors behind the miss: Brazil's ban on domestic prediction markets, thin liquidity, and a wave of retail traders that one prominent platform whale says diluted the influence of professional money right up to the finish. The miss matters beyond a single race: prediction markets have gained a following as forecasting tools for political events, and how their odds are built—and by whom—has become central to how much weight those odds deserve.

A market slow to shift

Luiz Inácio Lula da Silva—commonly known as Lula—defeated Bolsonaro in the presidential election held on Sunday. Bolsonaro had come out ahead in the first round of voting at the start of October but fell short of a majority, forcing a runoff. Lula won that second round with a majority and will now serve his fourth term as president.

Going into election day, Lula hovered around a 20% chance of victory on Polymarket, with Bolsonaro sitting at 80%. Even as polls and early results began to roll in, one large trader said the market was slow to push the odds toward Lula.

"Sharps [a term for professional, high-stakes predictors] knew the market was mispriced, probably closer to 30-40% on [event] day. Mispricing was most evident during live trading, Lula was nearly a lock by 6:15 pm ET when Lula 'Yes' was 60c," pseudonymous Polymarket whale FhantomBets told Decrypt. "Retail traders were so against Lula that you could get unlimited size at 60-80c when Lula had [essentially] already won."

Prediction market contracts settle at $1, so any price below that level—such as $0.60 on a "yes" bet for Lula in Brazil's election—represents the implied odds of that event occurring.

FhantomBets added that many whales—traders holding large positions—himself included, had been selling off long-term positions to raise liquid capital so they could add more size to the Brazil market. In his telling, retail traders with less prediction market experience kept Bolsonaro's perceived chances inflated until the very end.

A regulatory gap and thin liquidity

Luke Nolan, senior researcher at CoinShares, pushed back on the retail-blaming narrative, noting that Polymarket's pricing moved in line with polling results as they were released throughout the night.

"I don't think more users are inherently a problem. They can bring liquidity and different perspectives, including local knowledge. What matters is whether participation brings different information, and whether traders can act on it," Nolan told Decrypt. "I would be wary of explaining the result simply as professionals being right and retail being wrong."

Instead, Nolan suggested that Brazil's ban on prediction markets is likely a bigger reason the market was so harshly mispriced. Einar Knobel, CEO and co-founder of sportsbook and prediction market firm TxODDS, agreed.

"The price was set mostly by people outside the country," Knobel told Decrypt. "They were trading the first-round result, poll headlines, and the story built around them."

Brazil issued a sweeping ban against prediction market platforms in April, citing investor protection concerns and the rise of gambling addiction in the nation—a move that effectively left pricing to participants abroad. Finance Minister Dario Durigan said the platforms violated betting regulations and lacked proper regulatory oversight.

Liquidity was also thin. Knobel noted that the Brazilian election market drew just 4.5% of the volume that the 2024 U.S. presidential election attracted. "With fewer participants and almost no local knowledge in the book, little was there to correct the price," he said.

One upset, not a systemic failure

Nolan believes traders put too much weight on Bolsonaro's first-round performance, underestimated the increase in voter turnout for the second round, and made assumptions about how supporters of eliminated candidates would transfer their votes.

"That said, Lula was priced at around 20% before the vote," he said. "That is still some form of meaningful chance of winning. I think there are good reasons to question whether the market underestimated him. Ultimately, something that has an 80% chance of happening does not happen 20% of the time."

The mispricing was a significant upset, but Nolan cautioned against seeing it as a massive failure. He noted that prediction markets continue to price events better than traditional betting platforms, pointing to Betfair giving Hillary Clinton an 83% chance the day before the 2016 U.S. election.

"Across enough events, outcomes given a 20% chance should happen roughly 20% of the time. We should also compare their performance with other forecasts available at the same time," Nolan told Decrypt. "The concern would be a persistent pattern of overconfidence or a failure to incorporate relevant information, rather than an individual upset."

On that view, the Brazilian miss is not, by itself, evidence of a structural flaw. The gauge to watch from here, by that same standard, is whether outcomes priced around 20% keep landing about 20% of the time across enough events—or whether misses like Brazil's begin to form the pattern Nolan described.