Predictably Unprofitable

Prediction markets have scaled fast enough that advisors are fielding client questions about them alongside crypto and meme stocks. In this discussion, Charles Martineau, PhD, Vincent Grégoire, PhD, CFA®, and Nicolas Harvie, co-authors of "Who Wins and Who Loses in Prediction Markets? Evidence from Polymarket," lay out what their research on Polymarket actually found: about 40 percent of users post a positive profit and loss, but the top 0.1 percent of traders account for roughly half of all gains, and those top traders share one trait. They act as market makers, providing liquidity and reacting fastest to new information, rather than placing directional bets. Their conclusion for advisors fielding client questions: prediction markets function more like a derivatives market than an investment.

Key Takeaways

1. About 40 percent of Polymarket users generate a positive profit and loss, but the top 0.1 percent of traders capture roughly half of all gains.
2. The traders who win the most and the traders who lose the most share the same behavior: both provide liquidity and act as market makers rather than placing simple directional bets.
3. The CFTC classifies prediction markets as swaps, not gambling, because they can be used for hedging, unlike sports betting, which is regulated state by state with age and parlay restrictions.