Beyond Profit Rankings: Identifying, Understanding, and Evaluating Smart Money in Prediction Markets
Abstract: Prediction markets have emerged as an important mechanism for aggregating information and trading beliefs about future events. The transparency of on-chain transactions has enabled investors to identify historically profitable wallets, commonly referred to as smart money, and replicate their trading activities through copy trading. However, despite the growing popularity of smart-money tracking, systematic research on these wallets' trading behavior, profitability persistence, and the economic feasibility of following their trades remains limited. To address this gap, we conduct a comprehensive empirical study of Polymarket, the most popular decentralized prediction market, by reconstructing wallet-level trading activities from on-chain transactions, position changes, market histories, and settlement outcomes. We first examine the distribution and persistence of historical profitability using statistical analysis and logistic regression, and further characterize heterogeneous trading strategies through multidimensional behavioral profiling and unsupervised clustering. Building on these findings, we develop an evidence-grounded multi-agent research framework that integrates wallet behavior, market conditions, and real-world information to generate interpretable and verifiable explanations of individual trades. Finally, we implement a real-time copy-trading system and evaluate its practical feasibility through order-book-aware paper trading and live on-chain execution. Our findings reveal substantial behavioral heterogeneity among historically profitable wallets and highlight the challenges of translating observed trading performance into replicable economic returns.