Prediction Market Hype Returns Despite Skepticism

Prediction markets are experiencing a resurgence, gaining interest from major exchanges, established brokerages, and new crypto-focused startups. Despite this growth, skepticism remains about the potential for these platforms to become stable and reliable sources of information.

Key Takeaways

Prediction markets are reviving with the involvement of large exchanges and startups.
New platforms like The Clearing Company aim to combine decentralization with regulatory compliance.
Retail platforms, including Robinhood, are integrating prediction markets for sports.
Regulators are enhancing oversight to prevent market manipulation.
Concerns persist about the fundamental design issues of prediction markets, limiting their liquidity and participation.
Experts suggest that while prediction markets may evolve, they face hurdles in attracting consistent users and capital.

Prediction market hype returns despite skepticism

The Comeback of Prediction Markets

Prediction markets are back in the spotlight, attracting attention from established exchanges, mainstream brokerages, and a new wave of crypto-native startups. These markets, which offer insights on politics, finance, and sports, are gaining traction. Notable developments include Polymarket and Kalshi expanding their product offerings, Robinhood adding prediction contracts tailored for its app, and a Coinbase-backed team raising funds to create a regulated, on-chain alternative.

However, lingering doubts from past experiences remain. The central question is whether these markets can develop into reliable, long-lasting sources of information or if they are merely riding the current wave of hype, liquidity, and caution associated with new ventures.

New Developments in Prediction Markets

This summer, The Clearing Company announced a $15 million seed funding round, led by Union Square Ventures and supported by Haun Ventures, Variant, and Coinbase Ventures. The company, founded by a former Polymarket executive, aims to create “the first on-chain, permissionless, and regulated prediction market.” Their goal is to integrate the need for decentralization with the compliance required by institutional and regulatory partners.

Simultaneously, Polymarket, a prominent crypto-focused prediction platform, is making strides in the U.S. market thanks to a strategic investment from 1789 Capital and the addition of Donald Trump Jr. to its advisory board.

Retail Integration and Regulatory Oversight

Retail platforms are also joining the fray. Robinhood has introduced prediction markets in its app, initially focusing on professional and college football. These prediction markets are treated as tradable products rather than mere bets, allowing users to access live prices, modify or close their positions during matches, and utilize familiar onboarding and payment processes akin to stock trading.

This surge in prediction markets is garnering attention beyond investors and developers. Regulators are responding by enhancing their monitoring frameworks. The CFTC is employing Nasdaq’s Market Surveillance platform to gain a deeper understanding of trading behavior across derivatives, crypto, and event markets, aiming to spot manipulation and wash trading that could hinder public confidence as prediction markets become mainstream.

Concerns from Stakeholders

Professional leagues and their partners are also vigilant. For example, the NFL has raised concerns that unsupervised open markets on game outcomes could pose integrity risks without the oversight and information-sharing systems utilized by legalized sportsbooks.

While funding and user numbers are growing, industry experts point out that fundamental issues within market designs need addressing. An analysis published in the May 2024 issue of Works in Progress, a magazine backed by Stripe, argues that “without savers or gamblers to add volume to the market, the market cannot attract enough sharps to create the liquidity to drive prices toward accuracy.” Essentially, without consistent investment or a surge of participants, these markets risk remaining niche.

Analysis of Market Behavior

Data supports this critique. In scenarios where prediction markets do generate significant volume—like during elections or select macro hedges—they tend to peak just before events conclude, and the majority of contracts fail to reach sizes that generate profits for professional market-makers. The resulting lack of liquidity leads to erratic prices, and without a stable pool of capital or a steady influx of retail participants, there's limited motivation for large investors to engage.

According to Scott Duke Kominers, a research partner at a16z crypto, the future may not be about prediction markets in themselves. He suggests, “rather, prediction markets set the stage for more distributed technology-based information aggregation mechanisms.” He envisions these mechanisms aiding a variety of applications, from community governance to finance.

Looking Forward

Kominers highlights that markets are not universally reliable. For many inquiries, they can be inconsistent, and for numerous smaller questions, participant pools may be too limited to provide dependable signals. Nevertheless, he believes that the design toolset—ranging from data-pricing to peer-prediction schemes—combined with the audit capabilities of blockchains could lead to innovative ways of capturing and sharing collective insights.

What’s emerging is a hybrid approach. Venture capitalists and established players are investing in projects that merge on-chain transparency with regulated systems. They believe that improved user interfaces, compliant structures, and institutional involvement can resolve current issues with liquidity and trust.

However, skeptics argue that these proposed solutions fail to tackle the deeper issue of demand. If savers, gamblers, and hedgers don’t find these markets appealing compared to stocks, options, or sportsbooks, they will likely continue to remain small and sporadic.