Prediction Markets Are Booming: Here’s Why!
Prediction markets have gone from a niche concept to a $13 billion monthly industry in under two years, but it can be challenging to understand them in context. In this article, we’re going through what they are, what sets them apart from similar concepts, why they’re so big, and what limiting factors you should keep in mind.
Key Takeaways
- Prediction markets let users buy and sell contracts based on predictions for outcomes of real-world events.
- The prices of these contracts change in real time based on news and data.
- Research has shown that prediction markets can be good at actually predicting outcomes of events like elections.
What Are Prediction Markets and How Do They Work?
Prediction markets are platforms that let users buy and sell contracts based on predictions for outcomes of real-world events. Each market has a question with clearly defined potential answers (sometimes yes/no, sometimes multiple-choice). You buy the contract with the answer you believe in, get a profit if it turns out to be true, or lose your stake if it’s false.
In theory, the concept can sound very similar to betting on the outcome of an event, and it’s even been used as a way to poll the public’s opinion on something. However, it differs from these examples in a few significant ways.
There are two main differences between prediction markets and betting markets: who you trade against and who sets the prices.
In betting markets, the answer to both of these is the bookmaker: they’re the ones setting the prices, and you always bet against them, not other participants. The bookmaker doesn’t exist in a prediction market, which means you trade against other traders, and everyone’s interest (or lack thereof) in a contract sets its price.
Price changes, and therefore changes in public opinion on whether or not something is going to happen, can also help you adjust your position accordingly. All of this makes prediction markets closer to investment than betting markets can be.
Though prediction markets can be used as a polling tool, this is not their primary purpose, but rather the effect of the way they function. This potential use case was especially popularized through the example of the 2024 US Presidential Election, where research has shown that Polymarket, a large prediction market, was superior to polling when it came to predicting the outcome of the election.
With the combination of these two aspects, combined into a concept well beyond either of them, prediction markets become interesting to a wide range of people.
Why Are Prediction Markets Exploding?
Prediction markets have grown from less than $100 million in monthly notional volume in early 2024 to over $13 billion by the end of 2025, a 130x jump in less than two years. This period also saw a rise in transactions from around 240,000 to over 43 million, and monthly active users rising from 4,000 to 612,000.
A large part of this popularity comes from a general distrust of traditional media and polls. Small sample sizes, sampling bias, and misconstrued answers can all lead to plainly wrong forecasts, leading some to question the purpose of these polls.
Prediction markets, by contrast, offer something often referred to as the ‘Wisdom of Crowds’ theory, which claims that large groups of people, even if they’re not experts or aligned with each other, can often accurately predict the outcome of an issue. Though this isn’t set in stone and prediction markets are far from miraculous oracles, many see them as an interesting potential alternative to polling.
Bringing prediction markets on-chain also offers the advantages of blockchain’s transparency and verifiability. Positions can’t be manipulated by a central party, and anyone with the minimum funds and basic know-how can participate.
Finally, prediction markets are very responsive to news: they react to real-time information in seconds, with the prices moving according to every change. This also means being able to tell that something happened by the price changes before even hearing the news yourself. In other words, it can be an easy way to keep a finger on the pulse of whatever real-world event you’re interested in.
Magic Eden CEO Jack Lu stated in a tweet, where he announced the launch of his company’s new Dicey crypto entertainment app, that “we’re heading into a speculation supercycle {…} where finance merges with entertainment.”
“Prediction markets are all over Emmys and the news. Betting is the second fastest growing industry in the US after AI. Sportsbook sponsorships are all over everyone’s favorite sports broadcasts. Hyper casual games + real-money gaming are converging,” his tweet continued.
The Challenges
Prediction markets aren’t without problems. A few are worth understanding before you put money in.
One of the main issues is regulatory in nature. Depending on the jurisdiction, prediction markets can be treated as betting or financial derivatives, which means very different legal treatment. Politically sensitive markets can trigger crackdowns that shut down entire platforms. This can be a limiting factor on growth.
Then there’s the already mentioned high reactivity of prediction markets as their strength. However, this can also be used for market manipulation, especially in smaller markets. Bad actors or groups can spread false narratives, use these markets for political signaling, or even look to influence the outcome through a sort of self-fulfilling prophecy approach. Thinner markets are more susceptible to manipulation tactics. By contrast, other traders often step in to prevent this sort of exploit.
Depending on the platform, low liquidity can also be a challenge. This can mean difficulty entering or exiting large positions, wide bid-ask spreads, and more. It’s also the reason why it’s important to make sure the platform you’re choosing has sufficient liquidity.
Other potential roadblocks can be information inequality, where those with access to better data are rewarded, at the same time creating barriers for more casual participants, and participation bias, where preconceived notions and biases from prediction market users affect their rationale behind a prediction.
Finally, markets aren’t immune to irrational factors, which is why they can’t be treated like failsafe polling tools. Just like any other market, they can experience emotional trading, information cascades, and trend chasing, all of which are pretty common across the board.
Where’s It All Heading?
A distrust in traditional media, coupled with the transparency and built-in security of blockchain, has helped the popularity of prediction markets in the past couple of years. That, combined with the “financialization of everything” and how everyone’s glued to screens, prediction markets might become the “killer app” that onboards the next billion people to crypto.
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