Prediction markets are rapidly transitioning from a niche aspect to a burgeoning asset class, with monthly volumes nearing $10 billion, according to U.S. bank Citizens. Although this figure is small compared to the over $10 trillion in U.S. equities, they are expanding quickly as platforms like Robinhood (HOOD), Kalshi, and Polymarket grow.
The bank indicates that these markets tackle a significant issue in traditional finance by enabling investors to trade directly on events such as inflation data, election outcomes, Federal Reserve decisions, and regulatory approvals, rather than depending on rough alternatives like futures, exchange-traded funds (ETFs), or individual stocks.
Robinhood’s acquisition of MIAX’s derivatives exchange is viewed as a crucial move towards vertical integration and stronger connections with institutional investors, positioning event contracts as a link between retail and professional liquidity, analysts led by Devin Ryan reported.
Despite the risks posed by regulatory uncertainty, fragmented rules, and low liquidity, the analysts noted that prediction markets are already demonstrating greater responsiveness compared to polls or price proxies related to U.S. elections and bitcoin ETF approvals. The probabilities from these markets are likely to become integrated into quantitative models, risk management dashboards, and corporate planning, they added.
Over time, the analysts predict these contracts will evolve into a mainstream tool for hedging, speculation, and information dissemination, with the capacity to support a multitrillion-dollar annual market as institutional engagement increases.
Currently, adoption leans towards retail participants, primarily because these contracts are easier to understand than many derivatives, and sports events have naturally served as an entry point, the report highlighted.
As liquidity improves, market makers expand their involvement, and spreads narrow, the bank anticipates that institutional investors will begin to participate.
Event-driven hedge funds might leverage prediction markets for M&A activities, legal proceedings, and regulatory milestones. Macro funds could focus on CPI surprise markets, election probabilities, and geopolitical contracts as specific hedges.
Quantitative firms may treat prediction markets as high-frequency data feeds, linking changing probabilities to price fluctuations across equities, foreign exchange, and commodities. Corporate issuers might monitor these markets to time their capital raises or evaluate the chances of regulatory shifts that could impact their operations, as noted in the report.
Read more: Prediction Markets Are Coming to Phantom’s 20M User Via Kalshi
