Prediction Markets Melding with Macro, Markets and Media
Prediction markets, once seen as mere betting platforms for politics and sports, have emerged as focal points where cryptocurrency, artificial intelligence (AI) and news come together. The likes of Polymarket, Kalshi, Robinhood, and Coinbase are jostling to become dominant players in this landscape, according to analysts at research and brokerage firm Bernstein.
Understanding Prediction Markets
Prediction markets can be understood as trading platforms where people bet on future events by buying and selling contracts tied to these events. They convert the public’s expectations into quantifiable market signals. The contract prices usually range between $0 and $1, embodying the market’s opinion of the probability of the event. Let’s take Nvidia’s earnings as an illustration. If a contract tied to Nvidia surpassing its projected earnings stands at $0.80, it would signify that the market perceives an 80% chance of this happening. Since real money is invested, the market’s sentiments are live, measurable signals.
The Impressive Scale of Prediction Markets
The operations of these prediction markets are already astonishing in scale. The recent Bernstein’s report mentions that there was over $200 million worth of trades placed on Polymarket and $85 million on Kalshi on the Federal Reserve’s 25 basis points rate cut alone. Not only that, bizarre contracts like whether Taylor Swift will announce a pregnancy in 2025 is prevalent and one of the most active.
The Race: Polymarket vs Kalshi
In this exploding prediction market space, two particular platforms stand out – Polymarket and Kalshi. Polymarket is a decentralized platform on the Polygon/Ethereum network. It set a monthly volume record of over $2.6 billion around the U.S. presidential election. This platform demonstrated such accuracy in predicting the election outcomes and outperformed traditional polls. In contrast, Kalshi is a centralized and regulated U.S. exchange, which also had a record month in September and traded over $1.3 billion, surpassing Polymarket’s trades worth $700 million for the same period.
Such volume of trades suggest massive winnings but also attest to the prediction market’s maturity. The two platforms continue to indulge in a titanic struggle for the throne of prediction markets. They are eager to show that investing in predictive information doesn’t mean relying on a crystal ball, but leveraging a platform that amalgamates the collective wisdom of a broad spectrum of investors.
Regulatory Hurdles and the Push for Mainstream Acceptance
Despite its rising popularity, lack of regulatory clarity has been a challenge. Until recently, Polymarket could not cater to U.S. customers. However, new regulatory guidelines on prediction markets from the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC) have bolstered Polymarket’s drive. The firm has paved its path back to the U.S. market through the acquisition of a QCEX-licensed derivatives exchange and a no-action letter from the CFTC. Kalshi, on other hand, is enhancing its platform’s footprint with a focus on crypto/blockchain integration, intending to expand beyond the U.S. and tap into global markets.
The analysts state that things are moving swiftly towards mainstream adoption, and prediction markets are attracting partnerships and new product launches. An example is Robinhood’s partnership with Kalshi to launch a prediction hub that processed $1 billion in transactions in Q2 alone. Meanwhile, Coinbase is preparing to add prediction contracts to its platform, aligning with its ‘everything exchange’ vision, including tokenized equities. Another concern is Interactive Brokers, who launched its prediction market tool, ForecastEx, last year.
As the market grows, new partnerships are emerging that harness social media and artificial intelligence. For example, X has recently named Polymarket its official prediction partner while Elon Musk’s xAI is teaming up with Kalshi to provide AI-driven odds analysis. These collaborations only add to the growing popularity and credibility of prediction markets, making them an important part of investment strategies.
With a renewed regulatory clarity and endorsement, analysts believe that the evolvement of prediction markets is well underway. They predict that these markets will progress from fixed contracts on regulated exchanges to a more inclusive prediction market. This will comprise flexible and bespoke contracts and a ramping up of liquidity enabled by blockchain and cryptocurrency technology.
In the words of the Bernstein analysts, “Strong regulatory clarity is paving the way for the evolution of existing markets to an all-encompassing prediction market.”
On a closing note, Bernstein analysts, including Gautam Chhugani, hold long positions in several cryptocurrencies. It is worth mentioning that certain affiliates of Bernstein also serve as market makers or liquidity providers in some equity securities, including Robinhood and Coinbase.
Please note that all the information provided herein is purely for informational purposes and should not be construed as legal, tax, investment, financial, or any other forms of advice.
