By 2030, prediction markets are projected to exceed $10 billion in yearly revenue, significantly rising from a current annual run rate of nearly $2 billion, as institutional investors are increasingly turning to event-based contracts, according to a report from Citizens analysts.
Currently, the monthly trading volume for prediction markets is approximately $10 billion, as stated in the report, which is just a small segment of the over $10 trillion generated each month in U.S. equities. Nevertheless, Citizens believes the potential underlying event-sensitive exposure base surpasses $500 trillion, indicating a substantial opportunity for growth.
“With volume increases and spread compressions, the fee structure remains appealing due to nearly negligible costs associated with listing or settlement,” the analysts noted.
Citizens estimates that Robinhood Markets accounts for about $400 million of the existing revenue from prediction markets, where yes-or-no event contracts have quickly become the brokerage’s most rapidly expanding business segment. In October and November, Robinhood managed 5.5 billion event contracts, the report indicated.
In November, market leaders Kalshi and Polymarket achieved a combined notional volume of $10 billion, processing between 15 billion and 20 billion contracts collectively. These platforms have significant valuations in the eleven-figure range, though this has raised some eyebrows.
According to the analysts, institutional applications are expected to enhance future liquidity and revenue, as prediction markets enable investors to trade on specific events without the basis risk associated with traditional hedging instruments.
Event-driven hedge funds can focus on deal, litigation, and regulatory outcomes without incorporating beta or duration; macro funds can directly hedge against inflation data, policy changes, and geopolitical developments; quant firms can utilize probability curves as valuable data points; and corporations can leverage markets for optimizing capital raises, strategy planning, and investor relations communication, the report elaborated.
Citizens argued that binary event contracts offer cleaner hedges than sector ETFs or index options, addressing inefficiencies found in trading outcomes such as economic report releases, regulatory choices, and corporate mergers.
The analysts stated that prediction markets address a long-standing inefficiency by enabling investors to express their opinions on discrete events without the cross-factor basis risk that is commonplace in traditional hedging instruments.
The sector remains primarily driven by retail traders, but Citizens noted that growth is happening at a pace “seldom observed in fresh financial products,” thus characterizing the industry as being in a “foundational phase.” Sporting events and entertainment currently make up over half of the global contract totals; however, non-sporting markets are expected to expand more rapidly and ultimately dominate in terms of notional value.
The report draws comparisons to the early adoption periods for equity options, exchange-traded funds, credit default swaps, and interest rate swaps, which initially represented about five basis points of the market capitalization. Utilizing similar ratios reveals an early institutional potential of $250 billion to $500 billion in notional exposure.
“We believe these estimates reflect the inherent challenges of institutional adoption, taking into account documentation, risk modeling, capital treatment interpretations, liquidity maturation, and operational readiness,” the analysts added.
Citizens also pointed out that the competitive landscape has expanded to include regulated exchanges, blockchain platforms, brokerage firms, digital asset trading platforms, and sports betting companies. Robinhood’s acquisition of the derivatives exchange MIAX was highlighted as a significant milestone in market evolution.
Regulatory ambiguity remains the most significant hurdle, particularly amid jurisdictional conflicts between U.S. federal and state authorities regarding sports-related markets. Issues such as liquidity fragmentation, insider information hazards, and outcome uncertainty were also identified as challenges.
Despite these risks, Citizens managing director Devin Ryan believes prediction markets are well-positioned to become a mainstream financial instrument.
“Prediction markets seem set to evolve into a lasting and rapidly growing segment of the global capital markets and financial ecosystem,” Ryan wrote, suggesting that the industry could transition “from being primarily a speculative oddity today … to becoming a widely used financial instrument.”