Prediction Markets Quietly Emerge as a New Asset Class, Citizens Reports
Prediction markets are moving from a niche corner of finance into an emerging asset class with monthly trading volumes reaching around $10 billion, according to Citizens. Although still small relative to U.S. equities, this growth signals significant potential for expansion.
These markets enable the trading of event contracts directly on outcomes such as inflation, elections, Federal Reserve decisions, and regulatory actions, which addresses a key limitation in traditional finance where proxies rather than direct event bets were common.
Platforms such as Robinhood, Kalshi, and Polymarket are driving this growth. Robinhood's acquisition of MIAX's derivatives exchange is seen as a strategic move towards vertical integration and increased synergy between retail and institutional liquidity providers.
Despite regulatory uncertainty, fragmented rules, and current thin liquidity presenting risks, the potential applications of prediction markets are broad. They include hedging strategies, serving as information feeds for quantitative models, and aiding corporate planning. Hedge funds could employ these markets for mergers and acquisitions, litigation milestones, and regulatory events. Macro funds may use them for tracking CPI surprises, elections, and geopolitical contracts. Quantitative firms might map probabilities on these markets to anticipate price movements across assets.
Currently, adoption skews toward retail investors, driven by simpler contract structures and sports as an entry point. However, as liquidity deepens and bid-ask spreads tighten, increased institutional participation is expected, potentially scaling prediction markets to a multitrillion-dollar annual industry.
