Fundstrat Analysts Flag Systematic Mispricing in Clarity Act Prediction Markets

The probability of the U.S. Clarity Act becoming law is being systematically undervalued on leading prediction platforms, according to a new analysis from Fundstrat Global Advisors. The firm’s Head of Research Tom Lee and Digital Asset Strategy Associate Sean Farrell argue that regulatory restrictions barring informed insiders— including congressional staff, lobbyists, and policy advisors—from trading have created an artificial discount on contracts tracking the bill’s passage. “We see a clear disconnect between the on-chain probability and the real-world signals we gather from our policy network,” Farrell said in a research note shared with institutional clients. “The market is pricing in a 38% chance on Polymarket and 34% on Kalshi, but our qualitative indicators suggest a figure closer to 55-60%.” The Clarity Act, introduced in early 2024, aims to provide a comprehensive regulatory framework for digital assets, distinguishing commodities from securities and granting the CFTC expanded oversight of spot markets. The legislation has garnered bipartisan co-sponsors and has passed out of committee markup, but faces an uncertain floor schedule in an election year. “The structural issue is that the very people who have the most accurate read on a bill’s trajectory—Hill staff, trade association executives, former regulators now in the private sector—are often prohibited from participating in these markets due to compliance policies,” Farrell explained. “That creates a persistent information asymmetry that depresses prices below fair value.” Polymarket, a decentralized prediction protocol built on Polygon, and Kalshi, a CFTC-regulated exchange, both list contracts tied to the Clarity Act’s passage before the end of 2024. The combined open interest across both platforms exceeds $12 million, with the “No” side predominantly held by smaller retail wallets according to on-chain data analyzed by Dune. Tom Lee, a well-known crypto bull, amplified the thesis via social media, writing: “Sean and I believe the Clarity Act is one of the most mispriced events in prediction markets today. The upside is asymmetric—if you’re right, you get a 50%+ return. If you’re wrong, you lose your stake. That’s a bet worth taking with a small allocation.” However, the Fundstrat analysts caution that the trade is not without risk. The most immediate threat is that the bill stalls in Congress, a scenario that would cause contract prices to collapse toward zero as the end-of-year deadline approaches. “We are not predicting a sure thing,” Farrell said. “We are saying the probability is higher than the market believes. But timing is everything—if there’s no vote by September, we would reconsider.” To quantify the potential edge, Farrell built a simple Monte Carlo simulation assuming a 55% true probability and a market-implied 36% probability. With a contract payout of $1 per share if the bill passes and $0 otherwise, the expected value per share is $0.55, while the market price is ~$0.36, implying an expected return of over 52%. “The market is effectively offering a risk premium for taking on legislative uncertainty,” Farrell added. “But because the uncertainty is amplified by the absence of informed participants, the risk premium is too high. As the bill progresses, we expect institutional arbitrageurs to slowly correct this, but the process may take weeks or months.” From a macro perspective, the Clarity Act’s passage would be a watershed moment for the crypto industry. It would eliminate the current bifurcated regulatory regime where the SEC and CFTC dispute jurisdiction, potentially unlocking institutional capital that has been sidelined due to compliance fears. “This is not just a prediction market trade; it’s a bet on the entire ecosystem’s regulatory future,” Tom Lee said. Contrarian voices caution that the market may be correctly pricing in political headwinds. A U.S. election year often sidelines major legislation, and the Clarity Act includes contentious provisions around stablecoin oversight and decentralized finance reporting requirements. “I’ve seen this movie before—bills with broad initial support that die in the summer recess,” said a former Senate aide who spoke on condition of anonymity. “The insiders who are ‘banned’ from trading might actually be the ones who know how unlikely a vote is.” The anonymity of that criticism highlights exactly the problem Farrell identified: insiders cannot trade, but they also cannot signal their views publicly without risking employment. The market thus relies on a pool of traders who may be less informed than the excluded cohort. On-chain analytics reveal that the largest holders of Clarity Act “Yes” shares on Polymarket are a handful of wallets that accumulated between $50,000 and $200,000 each over the past month, with one wallet buying 150,000 shares at an average price of $0.34. This cluster buying suggests that some sophisticated actors are already betting on the mispricing thesis. Kalshi, being a regulated entity, has seen relatively smaller interest due to its KYC requirements and limited retail base. However, its contracts often serve as a more reliable baseline for compliance-aware institutions. The gap between Polymarket and Kalshi prices—currently about 4 percentage points—may itself be an arbitrage opportunity for those able to trade both platforms. Farrell’s analysis also considered the impact of the Clarity Act on the prediction market platforms themselves. “If the bill passes, both Polymarket and Kalshi will benefit from a clearer legal framework, potentially reducing regulatory uncertainty that has kept large players away. That could lead to increased liquidity and more accurate pricing going forward,” he said. “Conversely, if the bill fails, these platforms may face renewed scrutiny from the SEC, which has already taken enforcement actions against other crypto betting products.” The risk of regulatory backlash is non-trivial. The CFTC has previously warned that some event contracts may constitute illegal gaming, and the SEC has pursued cases against exchanges for offering unregistered securities. A failure of the Clarity Act could embolden these agencies to crack down. “Markets price in tail risks,” Farrell acknowledged. “But we believe the tail risk of a total shutdown is already reflected in the low prices. If a 10% chance of the bill passing and platforms being okay is already accounted for, our thesis still holds.” To strengthen their argument, the Fundstrat team compiled a proprietary “Legislative Momentum Index” that tracks bill sponsorship, committee votes, media mentions, and lobbyist spending. The index currently sits at 62 out of 100, a level that in past sessions has corresponded with a >50% passage probability for similar financial services bills. “When you look purely at the numbers—committee approval, bipartisan support, active lobbying from major financial institutions—the odds are better than the crowd believes,” Tom Lee concluded. “Prediction markets are powerful tools, but they are not immune to structural biases. This is a case where being contrarian requires courage, but the data supports it.” For traders considering the bet, the key catalyst to watch is the House Financial Services Committee’s summer schedule. If the bill is placed on the suspension calendar (a mechanism for non-controversial legislation), that would signal strong leadership support and could trigger a sharp re-pricing. Alternatively, any public opposition from the White House or Senate leadership would validate the current market skepticism. The Clarity Act narrative is a reminder that prediction markets are only as efficient as the participants allowed to enter them. As Farrell put it, “Information wants to be free, but regulation sometimes puts a lock on the door.” The question now is whether the market will eventually find a key. Macro trends crush micro-protocols. But sometimes, a micro-protocol can reveal a macro mispricing that the wider market has ignored.