Are Prediction Markets Mirroring Crypto's Boom?
Key Points
As prediction markets continue to go mainstream, they are following the same trajectory as crypto.
Wall Street firms and top fintech companies are now embracing prediction markets, much as they began to embrace crypto five years ago.
Options for investing directly in prediction market companies remain limited, but new ETFs are launching soon.
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Suddenly, prediction markets are everywhere. It's not just professional investors attempting to predict the trajectory of the economy or the stock market, it's everyday people attempting to predict the outcomes of sporting events, elections, and even geopolitical standoffs.
Sound familiar? In many ways, prediction markets are mirroring crypto's boom. What started as a somewhat sketchy and highly speculative activity carried out in the backrooms of the internet has suddenly gone mainstream.
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A booming new financial asset?
Using official "event contracts," investors are making predictions about interest rates, future GDP growth, and the ability of companies to hit their earnings targets. How is this really any different from top Wall Street analysts attempting to model enormously complex economic scenarios, or top strategists predicting the direction of a stock?
Indeed, Wall Street giant Goldman Sachs Group recently said that prediction markets could be a perfect fit for its financial derivatives business. Even the Federal Reserve has gotten into the act, with a new research paper suggesting that prediction markets could be enormously useful for economic policymakers.
The same phenomenon occurred with crypto. Approximately five years ago, Wall Street declared crypto a brand-new asset class with its own unique risk-reward profile. All of a sudden, investors started allocating tiny portions of their portfolios to Bitcoin, and the U.S. government started to wake up to the long-term potential of crypto.
Just another speculative mania?
On the other hand, prediction markets sometimes appear to be nothing more than a new form of legalized gambling. That's especially the case when it comes to making predictions about sporting events. The only difference here is that you are not betting against "the house" -- you are betting against other investors.
Image source: Getty Images.
So are prediction markets nothing more than just the newest speculative mania? As soon as get-rich-quick investors got tired of hunting after meme stocks and meme coins, they looked for other ways to make money overnight. And they naturally landed on prediction markets, where it's possible to bet on just about anything.
At a time when the crypto market is down across the board, prediction markets suddenly look very enticing to crypto investors. At the very least, there's now a chance to make money on the way down. All you have to do is predict that a certain cryptocurrency will fall to a certain price by a certain date.
How to invest in prediction markets
The really interesting twist here is that some investment firms are now rushing to introduce new prediction market exchange-traded funds (ETFs) so everyday investors can get exposure to this hot new market opportunity without actually putting their own money to work on platforms such as Kalshi or Polymarket.
Right now, these ETFs are limited to predictions about political elections, but it's easy to see how they could soon expand to include just about anything. In much the same way, the crypto market started with Bitcoin ETFs and has since expanded to include a wide range of other cryptocurrencies.
A better bet might be investing in the companies that are driving the prediction market boom. Since there's no way to invest directly in Kalshi or Polymarket right now, I'd focus on companies such as Robinhood Markets (NASDAQ: HOOD), where prediction markets have already gone mainstream. On the Robinhood app, for example, there are currently 1,672 clamoring for your prediction.
If prediction markets continue to follow the path of crypto, then get ready for plenty of high-stakes maneuvering in Washington, D.C. Already, a fight is brewing over who gets to regulate prediction markets, and this could have enormous consequences for which companies eventually emerge as winners.
Right now, it's not clear who these winners will be. But I'm sure there will soon be event contracts available on prediction market platforms that enable people to wager on the outcome.
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Dominic Basulto has positions in Bitcoin. The Motley Fool has positions in and recommends Bitcoin and Goldman Sachs Group. The Motley Fool has a disclosure policy.
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