The resurgence of prediction markets: a market for everything

Author: Mason Nystrom, Partner at Pantera Capital; Translated by AIMan@黄金财经

The prediction market renaissance is underway. While new prediction markets emerge periodically, there is now a vast array of prediction trading platforms across various market event types, form factors (e.g., mobile devices, Tinder swipe terminals), and geographies.

This renaissance is being catalyzed by several events:

1. The success of Polymarket and Kalshi: Prediction markets consistently generate billions of dollars in monthly trading volume. Their success—particularly in the election market following the 2024 US presidential election—demonstrates the demand for event-based markets.

2. Regulatory clarity for prediction market event contracts: On October 2, 2024, the Court of Appeals for the District of Columbia Circuit overturned a stay of execution, allowing Kalshi to launch its election contract. Robinhood launched its election market the same month. The enormous impact that regulatory clarity has on innovative companies in the financial markets is astonishing. 3. The Growth of the Speculator Generation: The median age of first-time homebuyers is 38, having risen significantly over the past few years. Retail zero-day options trading is poised to reach two-thirds of daily options trading volume, demonstrating retail investors' desire for quick profits in volatile markets. The TikTokization of financial markets continues, along with a desire to bet on more markets until no single one remains unconquered. While the speculative allure of prediction markets can inspire participation, these markets are by no means frivolous. By aligning incentives with information, prediction markets can help people discover accurate information and insights. Markets help predict outcomes, and a variety of new markets are emerging—including valuable ones for political events, corporate earnings forecasts, weather forecasts, and FDA drug approvals. As prediction markets grow, many teams are taking different product directions and go-to-market (GTM) approaches. From an investment perspective, I believe that the new breed of prediction markets that will achieve long-term success will focus on building superior products serving markets that share common characteristics: 1. Markets with high activity 2. Markets with high leverage, or the ability to win large sums of money with little capital risk 3. Markets with high outcome value – where there is signal in the prediction value Let’s discuss each of these in more detail. Users seek to increase returns through high leverage or by stacking odds. Parlay betting, perpetual betting, and intraday event markets—all of these prediction market products have the potential to increase demand for prediction market events. Imagine the midterm elections, where someone bets on correctly predicting all events. Given the rise of zero-day options, intraday markets (half-day, hourly, and minute-by-minute) are also worth considering. High-Frequency Markets Prediction markets are habitual—users bet on markets they're interested in. More markets help keep users engaged, but what really matters is the presence of high-frequency markets that drive user retention. Users who want to bet on high-volume, single events (such as presidential elections or pop culture events) can do so on any platform, and they're likely to choose the platform they use most often. Having more recurring markets also creates better economics for platforms, allowing them to launch more markets, acquire customers through paid channels, or become more competitive. This is already happening in sports betting, where platforms like DraftKings use DFS (Daily Fantasy Sports) as a valuable user acquisition and retention tool to cultivate habitual user behavior. High Value of Market Outcomes Elections are infrequent, but the signal value is high. This has attracted significant capital to these markets. Polymarket recently announced FDA approvals, decisions that could determine the success or failure of multi-billion dollar businesses. Kalshi's climate market has predictive signal value, and in theory, other types of derivative contracts could be built on daily prediction signals. Markets with high outcome value will attract more trading volume and deeper liquidity. Conversely, many pop culture markets—reality shows, Grammy winners, Nobel Prize winners—are entertaining but have low outcome value. Sometimes, the low outcome value is partly due to the game-play nature of the results. Prediction markets combined with live television shows like "Survivor" can be fun, but if the stakes are high enough, people will find ways to manipulate the market. The resurgence of prediction markets will leverage efficient markets to generate valuable predictive insights and provide a leveraged entertainment option for those trading individual stocks or betting on sports. We are about to witness an explosion in the types of markets and what people bet on. A market for everything is coming.