How To Make Money on Prediction Markets

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What is a Prediction Market

Prediction markets are legally speaking “derivatives” that allow you to buy and sell contracts on whether or not an event occurs. Historically prediction markets were used for political and economic events, but now under the Trump Administration which has taken a hands off approach to the industry, you can trade on virtually anything. Sports are by far the largest category and if it sounds like gambling to you that’s because it is functionally the same thing as a sportsbook without a bookmaker sitting between you and the bettor taking the other side. Prediction markets are regulated by the Commodity Futures Trading Commission and local regulatory authorities in each state.

How it works

A prediction market contract is usually quoted as a percentage of 100 with each point equaling 1%. For example, a prediction market with a price of 60 is implying a 60% chance that the event will occur. If the underlying event happens a contract expires at 100, if it does not, it expires at zero. If you think the probability of an event occurring is greater than the current market probability you can make a profit by buying it and either selling it at a probability that is higher as the event becomes more likely or waiting until the event happens and you get 100%. Conversely, if you think that the probability of an event occurring is lower than the current price or that it will not occur, you can sell a contract to someone else and then resell it at a lower price or wait for the event to expire.

Contract prices can easily be turned into an odds equivalent by dividing the number into 1 for Digital/European odds. For example, a price of 33 is roughly equal to 3.33 (1/.33). To convert contract price into American odds, first convert to European odds. Next for probabilities less than 50% or greater than 2.0 subtract one from the European odds and multiply by 100 or (Euro Odds-1)*100. For odds greater than 50% or less than 2.0 use the formula -100/(Euro Odds-1).  You can also simply use this odds converter.

Probability	European	American
10%	10.00	900.00
20%	5.00	400.00
30%	3.33	233.33
40%	2.50	150.00
50%	2.00	100.00
60%	1.67	-150.00
70%	1.43	-233.33
80%	1.25	-400.00
90%	1.11	-900.00

Example:

Yankees to win 70%, Euro odds equivalent 1.43, American odds equivalent -233.33

Blue Jays to win 30%, Euro odds equivalent 3.33, American odds equivalent 233.33

Things To Keep In Mind When Trading Prediction Markets

• Read the rules! Although a sporting event is usually straight forward, all other events can have more complex rules. Misreading or not fully understanding the way a contract is decided can result in a very costly mistake. If something looks to good to be true, you may not be understanding the contract correctly. It’s pretty rare (but not impossible) that markets consistently price an outcome incorrectly.
• The true price is the current order book not the last sale. The last trading price may not be the current price especially in thinly traded markets. If you are buying the available ask is the true price you can buy at and if you are selling the available bid price is the true price you can sell at.
• These markets are rife with insider trading. A solider was recently charged with making $400,0000 by betting on the ouster of Nicolas Maduro in Venezuela. When you are trading on markets where information is very closely held it is unlikely you have information that would allow you to profitably trade the contract. There is usually an asymmetry of information that will allow insiders to profit at the average trader’s expense.
• Most of the profits accrue to a minority of the accounts. A recent analysis by the Wall Street Journal determined that 0.1% of the accounts on Polymarket captured 67% of all profits. As is the case with all markets, be humble before the collective knowledge and skill you are competing against. Most markets are “efficient” and will accurately price most available information.
• Fees eat into your profits. All exchanges have trading fees that will reduce your expected profit. Some deposit methods also have fees associated with them.

Making Money On Prediction Markets

Although it may seem daunting to make money on prediction markets via pure speculation, the average person can make money. There are three basic ways to make or save money using prediction markets: bonuses, hedging, and classic arbitrage.

Bonuses

Pure prediction markets most notable Kalshi and Polymarket are currently in a high growth phase which means they are very eager to get users and rapidly grow revenues. Legacy bookmakers such as Fan Duel and Draft Kings are also eager to compete with the upstarts.  As a result, they offer significant incentives to new users and in some cases existing users.

A typical sign-up  promotion offers $25-75 for signing up and placing $20-75 of trades. You can easily extract the bonus without taking on significant risk via three methods:

Method 1: High probability trades

• If the terms allow it, buy a 95%+ event and hold it to expiration at 100%.
• This is by far the worst method. I have gotten burned enough times to avoid doing this.

Method 2: Buy and sell at a small loss

• Buy or sell a well traded market and immediately sell at a one or two point loss. The key here is to make sure there is enough volume that you can quickly exit your position before the price moves significantly. Avoid doing this during a game or event, only do it prior to the event itself.

Method 3: Buy/sell on the prediction market and bet the other side elsewhere

• Purchase a contract and then take the opposite side on another bookmaker or prediction market. You will likely lose a small amount in commissions or fees, but retain most of your funds including the bonus
• If you do this with your spouse or significant other make sure you are not doing this on the same exchange. They are unlikely to pick up on it, but in some cases they may which would result in a suspension. It’s best practice to use two different markets or bookmakers.

Current sign-up bonuses

Check to make sure that the promotion and market are available in your state before signing up.

Draft Kings Predictions

• Trade $25 get $25
• Note: I receive $25 if you complete this referral.

Fanatics Markets

• Trade $75 get $75

Kalshi

• Trade $25 get $25
• Note: I receive $25 if you complete this referral.

Polymarket

• Deposit $20, get $50. Not clear if you have to trade the $20. Must use promo code FREE50.
• Note this appears to be only available on the iPhone app. The desktop version appears to not be accessible to Americans yet.

Hedging

If you make bets elsewhere and want to reduce the risk of another bet or want to meet a bonus requirement elsewhere, prediction markets can help you hedge. Prediction markets are usually the closest to the best odds available so using them to hedge will reduce the total “vig” that you pay a bookmaker. Simply bet the opposite side of the event you want to hedge in a proportion that reduces your risk. For example, if you bet $100 at 2.0 for a payout of $200 and want to hedge 50% of your exposure, bet another $50 on the prediction market at around a little less than ~2.0 for a $100 payout. If you win your original bet you win $50, but if you lose you only lose $50 not $100.

Hedging can be a great strategy if you bet a multi team parlay and no longer feel confident about the third leg or just want to take money off the table. In general, non-correlated multi team parlays are not a great bet, but in the event that you already did one you can hedge the last leg of the bet. For example, a typical 3 team parlay at standard -110 odds will payout 6 to 1 or $600 on a $100 if you win all three legs. If you already won two legs and have one left you can hedge the final bet with $314 (assuming -110 on the final leg) and still walk away with a $186 profit ($600-100-314).

Classic Arbitrage

Arbitrage is the act of taking advantage of the difference in price between two similar/identical items or assets. In a prediction market this means buying a contract in one market/book at a price then selling the same contract in another at a higher price or doing the opposite, selling a contract in one market/book and then buying it at a lower price in another book/market. For the most part classic arbitrage is limited in most prediction markets. There are some esoteric markets where it is still possible.