What Are Prediction Markets?
Prediction markets allow you to buy contracts based on the probability of real-world events happening. You choose an event based on a “yes” or “no” outcome, e.g. “Will Keir Starmer still be Prime Minister of the United Kingdom by 2027?”
These contracts are binary options, meaning that the contract is settled either at $0 or $1. You buy a contract for a set value (e.g. $0.30) and so the maximum profit you can make on that wager is $0.70 if the contract settles at $1. Conversely, if it settles at $0, you lose the $0.30 per share. You can buy as many shares as you like, which is how you increase your potential profit on a successful trade.
Odds are based on supply and demand rather than odds set by the house. The price you buy a contract at remains the same once you’ve bought the contract, but you may not be able to buy at the same price later. You can typically also sell contracts later if the price has increased, so while you won’t get as much money as if the contract settled at $1, you can still make a profit.
Why Responsible Gambling on Prediction Markets Is So Important
You need to be responsible whenever you place money on markets, whether it’s stock or sportsbooks. Prediction markets are no different, but come with their own risks if you’re unprepared.
Insider Trading Risks on Prediction Markets
Prediction markets are one of the least regulated markets where you can trade or gamble. This significantly increases the risk of insider trading by individuals who are able to affect the outcome of the event. While prediction market sites attempt to prevent insider trading and monitor suspicious activity (e.g. extremely large purchases of contracts against the odds), it’s much harder to identify and track bad actors than on sports wagers, and there are fewer regulatory bodies to investigate.
Furthermore, as prediction market sites don’t act as the “house” as betting sites do, they stand to lose a lot less from long-odds predictions winning. The upshot is that if insider trading can go undetected, your wagers are less safe than in more regulated markets.
Are Prediction Markets Gambling or Trading?
Prediction markets advertise themselves as trading platforms. There’s an argument that all trading is gambling in a sense, especially if you’re putting money down without expert knowledge. However, some authorities consider prediction markets to be a form of gambling and it is banned in some jurisdictions.
When it comes to responsible gaming, this distinction doesn’t matter - you need to be cautious whether you’re trading or gambling. This is why most trading platforms come with disclaimers.
Can You Really Make Money on Prediction Markets?
Yes - but the easiest way to make money is to stick to markets that you know and understand. Placing a wager on the outcome of a political event in a foreign country, for example, is likely a bad move unless you follow that country’s politics very closely. However, buying contracts on an event happening in your specific field of expertise gives you a much better chance of winning money.
Strategies for Using Prediction Markets Responsibly
The best way to approach betting on prediction markets is to be ready to stop. This is another thing that prediction markets have in common with both betting and trading. Here are some strategies for using prediction markets responsibly.
Setting Financial Limits
The golden rule is to always consider how much money you have now, and not how much money you could have if you win. Until the contract is settled, you don’t have that money, and you will no longer have the money you’ve spent on the contracts.
Setting a monthly budget is a good start. Put aside an amount of money that you’d be able to lose without it significantly impacting your finances every month. If you can’t afford to lose every month, you shouldn’t be playing.
Using Cooling Off Periods
A cooling off period is when you take a break after losing money. It’s a common strategy when betting or trading, as there’s a strong urge to “win your money back” by making an impulsive bet on a market you don’t necessarily understand. Reactive betting is a good way to lose lots of money quickly, so be ready to cool off after a loss.
Likewise, you can take cooling off breaks after winning. Winning is a great feeling, and you can easily picture yourself turning your profits into even more money. Rather than going straight back into the market, take a week or so before placing your next wager.
Taking Regular Breaks
Scheduling set breaks is another good way to prevent yourself from getting in too deep. If you place a weekly wager for two months, consider taking the third month off. Monitor your finances across the months you’re wagering and those where you’re not - are your months off more secure? If so, you may want to opt out entirely.
Self-Exclusion From Prediction Markets
The nuclear option is self-exclusion. Most prediction market sites let you do this. Choosing to self-exclude means the site won’t let you log in for a set period. This means that even if you change your mind, you won’t be able to place a wager. This is the best option if you’re consistently losing money on prediction markets. Use your time off to consider if you may need to seek assistance for a gambling problem.
Responsible Gambling on Prediction Markets: Verdict
The best way to use prediction markets responsibly is to play only with money you can afford to lose, and to be ready to stop at any moment. You’ll give yourself the best chance of having a good time and winning money if you only place wagers on markets you have an expert understanding of. Being impulsive is the enemy of responsible wagering, so keep calm, make informed decisions, and be ready to call it a day if you need to.
