As Predicted, Prediction Markets are Taking Off

This newsletter is part of The Assetizer, GenTwo's thought leadership platform.


 

As a long-time fan of American sports, I have been following the baseball World Series (which concluded last night).  

While it proved an exciting (if somewhat lopsided) sporting event, what stood out to me relevant to my day job is the fact that Polymarket  - the prediction market - was the main sponsor.  

And not just for the World Series. Earlier this year the company inked a deal to be the “exclusive prediction-market partner” for all of Major League Baseball. There could hardly be any clearer signal that that this brand-new industry has come of age and done so very quickly.  

As Assetizer readers may recall, we wrote about prediction markets as a new type of asset class back in March. The conclusion of the Fall Classic (that’s American slang for the World Series) seemed a good opportunity to revisit this frontier market and see how things are developing.  

A Playing Field for Assetization 

In the original piece I pointed out that prediction markets were growing at a remarkable pace. That growth has accelerated. Today prediction market volumes are closer to USD 80 billion/month (most of which, admittedly, is sports).  

Because these markets let you trade on a very specific outcome, “event contracts” (the regulatory term for a prediction market bet) could, I surmised, provide fertile ground for assetization. This might include: 

• Packaging event contracts and/or different prediction-market strategies into a product, for example via an ETF or AMC (as with Bitcoin) 

• Using them as highly targeted investment or hedging instruments 

• Using them as a new type of market signal to help make investment and portfolio decisions, alongside traditional market data  

Green Shoots 

So seven months on, where are we? Here are some interesting developments. 

• Prediction Markets have established themselves as reliable providers of market data. Just yesterday news broke that Millennium Management, a major hedge fund, was building tools to mine event-contract pricing and sentiment for signals to aid in its positioning. These platforms are also increasingly attracting institutional and highly skilled professional investors, making them more reliable by reducing pricing errors and pure arbitrage opportunities. And as this recently published working paper from the Fed concludes, early evidence suggests that prediction markets can be quite good at forecasting. If you aren’t using them already as part of your market data, you may be missing something that others in the market are not. 

• The race for prediction market retail products is on in the US, if currently stalled. In the spring Bitwise, Roundhill and GraniteShares each applied to the SEC for approval for ETFs based on US election results. The thinking is similar to that behind Bitcoin ETFs: while retail investors have direct access to the asset class, a great many will prefer exposure through their existing brokerage accounts. That was anyway what these providers were betting on. They will have to wait a bit to see if their bet pays off. Announced to great fanfare, the were quickly put on hold by the SEC, which later bunched them into their overall consultation on the issue of “innovative asset classes”. Still, it seems likely that these ETFs will see the light of day sooner rather than later. That should do a great deal to legitimize the asset class. 

• We are seeing the first prediction market structured products in Europe. In April, Marex issued a capital-protected note that pays a 7% coupon if Nvidia is still the world’s largest company a year from now. The note, up to USD 10 million, went to a Swiss institutional client, and Marex uses Kalshi contracts to hedge the exposure. In September, Otala announced that it had partnered with Kalshi to issue listed securities based on Kalshi event contracts, beginning with Fed rate decisions and expected to list on Euronext Milan. The idea is to give European investors exposure to prediction markets through securities they can hold in an ordinary brokerage account. 

Getting In On The Act 

What to make of all this? 

For asset managers this feels like a window of opportunity.  

Prediction markets have the data, the liquidity and now the first wrappers, but almost nobody is yet offering clients a product built on them.  

The people who will own this category are the ones who learn the mechanics now, start with what is allowed today, which is products for professional investors, and are ready with a retail version when the regulators decide. Waiting for the rulebook to be finished means arriving after the market has been divided up.

Tom Lyons, GenTwo