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One of the big trends last week at iFX was prediction markets. 

There are four potential problems that I think prediction markets have.

  1. The market has already been taken over by Kalshi and Polymarket. Unless you have a built in client base that you can cross sell to, it’s hard to see how you can compete. Currently the opportunity seems to be in emerging markets / offshore, particularly China. However, there are already crypto exchange-backed firms that are doing this, presumably with very deep pockets.
  2. A big part of the prediction markets success story is that they are federally regulated in the US. Gambling firms must get state-level licenses. This means a US-based prediction market can immediately offer a gambling product across the whole US, whereas an iGaming firm cannot do the same. This dynamic does not exist in a lot of other markets, because sports betting is already legal. Given 80% of volumes are in sports, this suggests a lot of prediction markets’ popularity in the US is due to this regulatory arbitrage.
  3. Revenue for prediction markets is good but not that good. You tend to be limited to $0.01 per trade. This can obviously be an extremely high commission if someone is trading high volumes in low-odds contracts. But the bottom line is that commissions require a large client base trading a lot of volume for this to be a good money maker.
  4. Regulation. Prediction markets are binaries and are thus very difficult to offer in key markets, like the UK, EU, Australia, and Singapore. Even big offshore binaries brokers, like Olymptrade and Pocket Option, do not accept UK customers, for example.

When you look at these problems from the perspective of a prop firm, however, things change.

Firstly, you don’t have the regulatory problem. Because you are not trading the ‘real’ market, you get the exact same benefit as you do running a CFD prop – there is no license needed and you will not face the same restrictions on paid advertising.

This also puts you at an advantage against the big incumbents because they cannot do marketing in many of these regions or even take customers via reverse solicitation. Thus a prediction markets prop could heavily market in regions that cannot be touched by the big prediction markets players.

For example, Kalshi and Polymarket do not accept UK customers, although the latter does sometimes seem accessible if you use a VPN. A prediction markets prop firm does not have this problem and could actively market to clients in the UK.

The next part is revenue. Let’s say you take a $100 prediction market challenge. If the average contract value for a regular prediction market firm is $0.50, it would require someone to trade $5,000 in value for you to make the equivalent amount in commissions.

This also helps with the first problem of competing with the big incumbents. A new prediction markets prop firm that is actively competing with a firm like Kalshi can generate much more revenue per user, compared to a new pure play prediction market that needs to generate high trading volumes for revenue.

What are the downsides?

Firstly, there is a difference between a simulation and the real thing, a problem some of our lonelier readers may be all too familiar with. 

Basically trading actual event contracts is likely to be more exciting than trading the prop version. I would imagine that client acquisition will be harder as a result for a prop firm offering this product. 

The other one, which I think remains unanswered, is on sports betting. 

If prediction markets’ success is mainly predicated on Americans betting on sports, I don’t know how appealing the product actually is in most of the world.

Although you hear a lot about funny event contracts generating trading activity, their actual proportion of overall volumes seems to continue to be quite low. 

To use a different example, a couple of years ago, Trade Tech Solutions, a tech provider in the prop space, tried to push into sports betting props. It looks like that never really took off. 

Why? Because the main market for that would have been the US, where it could have been an arbitrage on gambling regulations. But now there is already an industry doing that – prediction markets. D’oh.

What does this mean in practice? if you are trying to market a product that is only popular because of sports betting and you can already do sports betting in the markets you want to target, it’s kind of pointless.