Revival of the prediction market: Everything has a market

Author: Mason Nystrom, Partner at Pantera Capital; Translated by: AIMan@Jinse Finance

The revival of prediction markets is underway. Although new prediction markets appear periodically, today there are a wide variety of prediction trading platforms for different types of market events, formats (such as mobile devices, Tinder swipe interfaces), and regions.

This revival was catalyzed by the following events:

1. The Success of Polymarket and Kalshi: The monthly trading volume of prediction markets continues to reach billions of dollars. Their success—especially in the election markets following the 2024 U.S. presidential election—demonstrates the demand for event-based markets.

2. Regulatory Clarity for Predictive Market Event Contracts: On October 2, 2024, the D.C. Circuit Court of Appeals denied a stay, allowing Kalshi to launch its election contracts. Robinhood launched its election market within the same month. The significant role of regulatory clarity in enabling innovation for financial market companies is remarkable.

3. Growth of the Speculation Generation: The median age of first-time homebuyers is 38, which has risen significantly over the past few years. Retail zero-day options trading is about to reach two-thirds of daily options trading volume, indicating that retail investors are eager to profit quickly in a volatile market. The TikTok-ification of financial markets continues, accompanied by a desire for more market bets until no market is left to conquer.

While the speculative appeal of prediction markets can stimulate participation, these markets are far from frivolous. By combining incentive mechanisms with information, prediction markets can help people discover accurate information and insights.

The market helps to predict outcomes, with various new markets emerging—including valuable markets for political events, corporate earnings forecasts, weather predictions, and FDA drug approvals.

With the growth of prediction markets, many teams have adopted different product directions and go-to-market (GTM) approaches. From an investment perspective, I believe that new prediction markets capable of achieving long-term success will focus on creating excellent products that serve markets with common characteristics:

1. A frequently active market

2. Markets with high leverage or the ability to win large amounts of money with relatively little capital risk.

3. Markets with high result value - there are signals in the predicted values.

Let's discuss them in more detail.

High Leverage

Users hope to increase profits through high leverage or compounded odds. Parlay betting, perpetual betting, and intraday event markets—all of these predictive market products have the potential to increase demand for predictive market events. Imagine a midterm election where someone bets on correctly predicting all events. Given the rise of zero-date options, intraday markets (half-day, hour, minute) are also worth considering.

High-Frequency Market

Prediction markets are habitual - users come to bet on the markets they are interested in. More markets help maintain user engagement, but what really matters is the presence of high-frequency markets that can drive user retention.

Users who want to bet on high-traffic, single events (such as presidential elections, pop culture events, etc.) can place bets through any platform, and they are likely to choose the platform they use most often. Having more repetitive markets will also create better economic benefits for the platform, enabling it to launch more markets, pay for customer acquisition, or enhance competitiveness. This situation has already appeared in the sports betting field, where platforms like DraftKings leverage DFS (Daily Fantasy Sports) as a valuable user acquisition and retention tool to cultivate habitual behavior among users.

Market Results High Value

Elections are not frequent, but their signal value is very high. This attracts a large amount of capital into these markets. Polymarket recently announced the FDA approval results, which will determine the success or failure of billion-dollar companies. Kalshi's climate market has predictive signal value, and theoretically, there are other types of derivatives contracts that can be established based on daily predictive signals. Markets with high result value will bring more trading volume and deeper liquidity. In contrast, many pop culture markets—reality shows, Grammy winners, Nobel Prize winners—are interesting, but have low result value. Sometimes the low result value is partly because the outcomes are playable. Predictive markets combined with live television shows like "Survivor" could be interesting, but if the stakes are high enough, people will find ways to manipulate the market.

The revival of prediction markets will leverage efficient markets to generate valuable predictive insights and provide customers trading individual stocks or betting on sports events with a leveraged form of entertainment. We are about to witness an explosive growth in market types and the objects of people's bets. The era of markets for everything is about to arrive.