Prediction markets will see five-fold growth by 2030: analysts

[NEW YORK] Prediction markets companies are likely to see their revenues grow by a factor of five to more than US$10 billion by 2030, according to analysts at Citizens Financial Group.

Companies such as Kalshi and Polymarket have recently seen soaring trading volumes on their event contracts, which offer a regulated way to bet on sports, politics and culture.

Devin Ryan and a team of analysts at Citizens estimate that the industry’s revenues are currently running at around US$2 billion a year. They believe that Robinhood Markets, which offers trading on Kalshi contracts, it has been the fastest scaling product in the company’s history and already accounts for around 10 per cent of the company’s revenue.

But there is more “exponential” growth ahead, the analysts conclude in a note sent to clients on Monday (Dec 15), as hedge funds and others use these markets to place bets on the probability of central bank moves and mergers and acquisitions.

“We apply some similar parallels to the kind of adoption that we saw in products like options in the early days and the amount of penetration we saw early on and that gets us to the multiples of the dollar value that is being transacted today,” Ryan said.

Prediction markets have offered a way to bet on sports even in states where gambling is not legal, and this has accounted for a majority of Kalshi’s business to date.

This is, in itself, a big business opportunity, with legal gambling representing a US$100 billion market globally, according to Citizens. Sports gambling companies have recently made moves to offer event contracts so they can compete.

But the Citizens analysts say that prediction markets offer a direct, binary way to bet on economic and corporate events that could be useful to a broad array of investors. They argue that is possible, in part, because prediction market exchanges can spin up contracts so quickly and “because they offer unmatched precision in expressing views and hedging idiosyncratic risks that traditional tools cannot adequately isolate”.

“We are in the very early days, people are focused on sports because that is where the activity is,” Ryan said. “I think that is missing the bigger picture. The bigger prize is going to be the broader prediction markets around things that influence the economy or companies.”

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This trading could also generate odds and signals that will “become embedded in institutional workflows, feeding quant models, risk dashboards, and macro allocation frameworks in the same way that credit spreads, options skews, and implied volatilities are used today”, the analysts wrote.

A number of big financial exchange companies have recently gotten into the business. The Intercontinental Exchange is investing as much as US$2 billion in Polymarket and the CME Group has spun up a new trading app with the sports gambling company FanDuel, a unit of Flutter Entertainment.

There are still big regulatory questions facing the industry, but the analysts believe that there is precedent for navigating these issues from the crypto and options markets. BLOOMBERG