Prediction markets have never been more visible. Every major news event seems to generate a new contract, social media is filled with screenshots of market odds, and platforms like Kalshi and Polymarket continue to add users at a rapid pace.
The headlines make it feel like prediction markets have become a mainstream financial product. The reality underneath the surface is more complicated.
Low Volume on Lots of Markets
While a handful of markets generate millions of dollars in trading volume such as the current World Cup champion, the overwhelming majority attract very little activity.
Many contracts sit with limited order books, and only a handful of participants willing to trade. This makes it much harder to trade successfully.
That doesn't necessarily mean prediction markets are failing. It simply shows the industry is still in its early stages.
Additionally, prediction markets do much more than traditional sportsbooks, so they need to expand their userbase.
Most attention naturally flows toward major events and for Kalshi and Polymarket, this has been sports. Presidential elections also have been a substantial driver in volume.
Once markets move outside those headline events, participation drops off quickly. However, there are so many niche markets that would likely never drive high volume.
Without enough buyers and sellers, prices become less efficient and larger orders can move the market much more than expected. That creates an interesting challenge for prediction market operators.
Pros and Cons
One of the biggest selling points of these platforms is that prices represent collective wisdom. When enough independent traders participate, market pricing often becomes a useful forecasting tool.
The problem is that collective wisdom only works when enough people are actually participating.
Thin markets can sometimes exaggerate probabilities because it only takes a few traders to push prices in one direction. Someone placing a relatively modest order may create the appearance of major market movement when, in reality, very little capital changed hands.
That doesn't make the prediction wrong. It simply means the confidence implied by the price deserves additional context.
This is something experienced traders already understand, and they take advantage of the flaws.
Rather than looking only at probability, many watch trading volume, open interest, and the depth of the order book before deciding whether a market is sending a meaningful signal. A contract with significant liquidity generally provides more confidence than one where only a few thousand dollars have traded.
Even so, liquidity has steadily improved as prediction markets continue expanding.
Sports contracts have introduced an entirely new audience to the space, while partnerships with financial platforms have made event contracts easier for retail investors to access. Every new participant increases the likelihood that more niche markets eventually develop healthier trading conditions.
As more traders join a platform, market makers have greater incentive to provide liquidity, tighter spreads encourage additional trading, and stronger participation creates more reliable pricing. Financial exchanges have followed this same pattern for decades.
The biggest question is how quickly prediction markets can reach that point as prediction markets are still in their infancy.
Adding hundreds of new contracts every week sounds impressive, but quantity alone doesn't guarantee healthy markets. It could be best to just focus on high volume markets for exchanges like Kalshi and Polymarket.
Operators want to give users endless options, but they also need enough liquidity concentrated in each market to produce meaningful prices. Too many contracts can spread traders too thin, while too few limit user engagement.
The Trade Handle Prediction Markets Take
For now, prediction markets remain a tale of two types of markets. The biggest contracts continue attracting enormous attention and significant capital. Smaller markets, meanwhile, are still searching for the trading activity needed to become truly efficient.
If prediction markets eventually become a daily destination for investors instead of a place people visit only during major news events, liquidity across the board should improve naturally.