Crypto-Adjacent Prediction Markets Are Seeing a Meteoric Rise. Here Are 3 Warnings for Investors.

To say that prediction markets have taken the world by storm would be an understatement. A recent report estimated that trading volume on prediction markets increased from under $100 million per month in early 2024 to more than $13 billion by the end of 2025.

Prediction markets allow people to trade contracts tied to the outcome of future events. That's a fancy way of describing betting on events, from politics to sports.

The risks involved in prediction markets position it alongside cryptocurrency trading and help explain the industry's explosive growth. It has launched companies such as Polymarket to mainstream fame and unlocked growth opportunities for Robinhood Markets.

But as exciting as prediction markets are, there are three warnings to keep in mind before trading in them or investing in the companies involved.

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1. Like cryptocurrencies, trading in prediction markets is speculative

While cryptocurrencies have various potential uses, many people trade them in hopes of making a quick profit. The appeal of a quick and easy payout has swayed people for centuries, if not longer. After all, people don't evolve nearly as quickly as technology does.

Remember that trading in prediction markets is arguably equivalent to gambling. It's crucial to isolate any capital used in prediction markets to money you can afford to lose, and it should be a tiny amount compared to what you're investing.

2. The rules aren't clear yet

You're not necessarily up against the house when you trade in prediction markets; this isn't quite a casino. That said, the rules of prediction markets aren't always concise. Suppose you buy a contract on a recession occurring this year. How does the platform define recession, and how does it apply to your contract?

Additionally, there aren't clear guardrails for maintaining fair play in prediction markets. What if someone knows something about an upcoming event that isn't public knowledge? That's essentially insider trading, and it's not nearly as monitored in prediction markets as it is on Wall Street.

3. Regulation could change the game at any moment

Lastly, the companies that operate these platforms could face regulatory hurdles at any moment. Investors should keep that in mind if they own stock in a publicly traded company operating a prediction market, such as Robinhood. Experts believe that prediction markets will continue to grow, and as they grow larger, they will attract more government attention.

I get it, prediction markets can be fun. And if their popularity continues to soar, the companies operating these platforms could be tremendous investments. Before jumping in, it may be wise to look at the bigger picture and weigh all the risks alongside the potential rewards.

Justin Pope has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.