Crypto.com Expands into Prediction Markets – Is the Exchange Trading Against Its Users?

Crypto.com is enhancing its presence in prediction markets by establishing an internal market-making desk. This development has sparked discussions regarding potential conflicts of interest and whether exchanges like Crypto.com might trade against their users. As the prediction market sector grows, concerns over transparency and fairness in trading practices have emerged.

Key Takeaways

Expansion into Prediction Markets: Crypto.com plans to hire a quantitative trader to operate an internal market-making desk focused on prediction markets.
Potential Conflicts of Interest: The practice of using internal market makers raises questions about whether exchanges are trading against customers, similar to traditional sportsbooks.
Regulatory Scrutiny: Concerns exist regarding market-making practices, especially for platforms regulated in the U.S., due to potential unfair advantages for large traders.
Growth of Prediction Markets: Despite the issues, prediction markets are experiencing significant growth, with high trading volumes in both crypto and traditional finance.

Crypto.com’s Focus on Prediction Markets

Crypto.com is taking a significant step into the world of prediction markets by planning to set up an internal market-making desk. This move has brought renewed focus to how such platforms function and raised questions about whether exchanges could be trading directly against their own users.

Based in Singapore, Crypto.com is looking to recruit a quantitative trader to join a team that will be responsible for buying and selling financial contracts tied to sporting events on their prediction market platform.

Debate Over Market-Making and Liquidity

As reported by Bloomberg, this new role will sit within Crypto.com’s market-making desk, where the trader will actively buy and sell against customer orders to help maintain liquidity in sports contracts and other derivatives on the company’s U.S. platform.

The decision to bring in an internal market maker coincides with the rapid expansion of prediction markets in both the cryptocurrency and traditional finance sectors.

These markets allow users to trade contracts that settle based on real outcomes, such as the results of sports games or political events, with the prices reflecting implied probabilities from market participants.

However, while prediction markets have typically advertised themselves as neutral trading spaces, the introduction of in-house market makers is prompting debates around potential conflicts of interest.

Market-making has become a particularly sensitive subject for exchanges dealing in event contracts, especially those operating under federal regulations in the U.S. Critics claim that if an exchange or its affiliate takes the opposite side of a customer’s trade, it could mirror the operations of a traditional sportsbook that profits from customer losses.

Similar concerns have been raised in other parts of the industry. Kalshi, a well-known regulated prediction market platform, has its own internal trading unit called Kalshi Trading. Meanwhile, Polymarket, another major decentralized platform, is reportedly working on establishing its own market-making team.

In their job listing, Crypto.com stated that the new hire would aim to “maximize profits while carefully managing risks.” This phrasing has fueled discussions about whether the exchange is fundamentally trading against its users.

In response, a spokesperson from Crypto.com emphasized that the company does not depend on proprietary trading for revenue. They characterized their business model as one that provides customer access to digital assets and event contracts for a fee and maintains a risk-neutral stance. Furthermore, the spokesperson noted that the internal market maker does not have privileged access to customer order flows or proprietary information and operates according to guidelines disclosed to the Commodity Futures Trading Commission, which oversees derivatives markets in the U.S.

The Growth of Prediction Markets Amid Regulatory Concerns

Crypto.com has also sought to attract external liquidity providers. Like its competitors, they are working to bring in professional trading firms to ensure ongoing buying and selling, especially in high-demand sports markets.

However, the company's policies give designated market makers in sports contracts a three-second advantage over smaller traders. This has raised eyebrows regarding the potential for larger participants to adjust prices ahead of retail investors.

Despite these issues, the prediction market industry continues to flourish, with contracts related to sports and politics fueling much of the recent increase in activity. Platforms such as Kalshi, Polymarket, and Limitless collectively experienced around $44 billion in trading volume this year, with Kalshi reaching approximately $1 billion in weekly volume at its peak.

On-chain prediction markets are growing even more rapidly, with monthly volumes soaring from below $100 million in early 2024 to over $13 billion, as demonstrated by research from Keyrock and Dune Analytics.

Big crypto players are also entering the prediction market arena. For instance, Coinbase recently launched prediction market trading on its platform and agreed to acquire The Clearing Company to expand its regulated event-based markets. dieser Move occurred following Kalshi’s impressive $300 million Series D funding round, solidifying a $5 billion valuation and highlighting investor enthusiasm in this sector.