Prediction Markets: The Uncorrelated Shadow Exchange

One where a macro shock doesn’t drain liquidity but creates a new tradable market opportunity. 

Largely indifferent to risk-on, risk-off cycles, prediction markets are emerging as a parallel financial system. They don’t price cash flows or discount rates; they price narratives, political outcomes and collective coordination. And their growth has become hard to ignore. 

As capital retreated and volumes compressed across equities, commodities and digital assets, prediction markets moved in the opposite direction. January alone saw roughly $26bn in trading volume, the highest monthly print since the industry's inception. 

Cumulative volume has now crossed the $100bn threshold, reaching $113.3bn, a milestone achieved not during a bull run but amid widespread financial market stress. 

While broader assets are tightly coupled to liquidity conditions, risk appetite, and macro cycles, prediction markets remain largely uncorrelated as the inputs driving the outcomes are orthogonal to the variables investors usually obsess over. 

Their activity does not depend on bull or bear regimes, nor on appetite for direct exposure. It solely depends on new information flows from the real world. Interest rates can spike, equities can sell off, crypto can implode - but in every single case, a binary outcome is created and traded.

In short, the overall direction is irrelevant. 

New markets are generated daily. The event stream never stops, and this is prediction markets’ structural strength. It is precisely why they tend to flourish when traditional markets become unstable.  

Instead of expressing conviction through duration, beta, or leverage, prediction markets collapse complexity into a single question with two possibilities - yes or no - stripping away most of the noise. 

(Source: Similarweb)

The shift is no longer theoretical. Over the first month of the year, Polymarket attracted 38.4mn website visits, putting it shoulder-to-shoulder with Robinhood and well ahead of platforms like Coinbase. Aggregate it with the traction of Kalshi and prediction markets lead the pack.

For markets that trade outcomes rather than assets, that level of attention signals something deeper: a shift from price to probability discovery. 

From kickoff to trading activity 

The Super Bowl has just wrapped up, closing another NFL season that once again dominated the US sports calendar for several months. Alongside television audiences and traditional betting volumes, it also left a clear footprint on prediction markets. 

Over the course of the season, and into the final weeks leading up to the Super Bowl, the clearest expression of this dynamic has played out on Polymarket and Kalshi, where trading activity has increasingly concentrated around sports-related outcomes.  

Game results, player performance, season-long narratives or half-time shows steadily accumulated volume, providing a recurring flow of markets rather than a single spike tied to one-off events. 

Across the NFL season and Super Bowl–related markets, more than $800mn was traded on Polymarket alone, with the Super Bowl final result accounting for $55.3mn. 

To put those numbers in perspective, $133.8mn was reportedly wagered on the Super Bowl through Nevada’s 186 sports books, the historical epicenter of US sports gambling. 

For an event that remains largely confined to a US audience, the scale of participation highlights how rapidly sports have emerged as a primary source of trading volume on prediction platforms. It also points toward a potential inflection with upcoming global competitions, led by the FIFA World Cup, which may prove decisive in pushing prediction markets to another level entirely. 

Activity distribution across dominant venues

Polymarket and Kalshi together account for roughly 80% of total prediction market activity. When including Opinion, the share rises to around 98%, though that platform remains outside the scope of this analysis due to its materially lower adoption and user stickiness. 

To assess where recent growth has concentrated, average traded volumes by category were aggregated over the past three months across Polymarket and Kalshi, the two venues driving the bulk of sector expansion.  

(Source: Dune Analytics)

Over this period, Kalshi’s trading activity grew faster, with total traded notional up 170.4%, compared with a 55.4% rise on Polymarket. Cumulative trading volume now stands at approximately $38.66bn on Kalshi and $51.06bn on Polymarket. 

On the latter, activity remains relatively diversified, though the sports subcategory has taken the lead. Sports-related markets account for 39.44% of average trading volume, driven primarily by the NFL but extending into basketball and more niche segments such as esports. 

While political markets drove the initial spike in activity, the dynamic flipped quickly after the November 2024 US presidential election. Within a month, sports expanded from about 15% of total volume to roughly 60%. 

Politics and macroeconomics, meanwhile, still represent 29.23% of the trading volume as of 11 Feb. These are highly concentrated around high-attention themes such as US election dynamics, geopolitical tensions - notably US–Iran relations - and Federal Reserve–related outcomes.  

Crypto is the third-largest market, accounting for roughly a quarter of trading volume, largely tied to directional price predictions on Bitcoin and Ethereum across different time horizons – most notably the 'Up or Down' over 15-minute windows, where the bulk of the volume sits. 

These markets tend to attract more systematic participation, with a noticeable presence of automated and high-frequency strategies. This dynamic has, in turn, prompted Polymarket to adjust elements of its fee structure in recent months, aiming to better manage short-term, taker-heavy flow. 

(Source: Dune Analytics)

Where Polymarket offers a relatively balanced mix between politics, crypto, and sports, the contrast with Kalshi is striking. Over the past three months, close to 89% of Kalshi’s traded volume has concentrated in sports, with the remainder reduced to marginal slices of roughly 3% each in politics and macroeconomics, and crypto. 

Everything else barely registers. 

The concentration is largely driven by flagship US sporting events – NFL, the Super Bowl and NBA seasons - and, more importantly, by Kalshi’s sports combo functionality. These structures closely resemble traditional sports betting: participants can stack multiple outcomes, compound probabilities and mechanically amplify payoffs. 

It is gambling, cleanly packaged in market form. 

Sports naturally absorbed the bulk of US retail attention once prediction markets were made easily accessible, and the recent nationwide rollout of Coinbase Prediction Markets via Kalshi - now live in all 50 US states - only accelerated this dynamic. But a wide distribution does not automatically translate into diversification. Attention still clusters where habits already exist. 

Taken together, sports and crypto-driven price prediction bets account for roughly 80% of total day-to-day trading activity. Sports have dominated weekly rankings consistently over recent months, and not just cyclically; the pattern holds over longer horizons. Politics and macro matter episodically, while sports clear almost continuously. 

In common usage, prediction markets currently serve as venues for risk expression and probabilistic gambling rather than as genuine hedging instruments, despite being structurally well-suited for that purpose. The bulk of participation reflects speculation rather than structured protection. 

But looking beyond traded volume and into open interest on unresolved markets tells a subtler story. Volume captures attention; open interest captures intent. 

And it is there that prediction markets still hint at what they could become when used less for titillation and more for risk transfer. 

The capital structure beneath the flow

Capital locked into longer-dated political, regulatory or macro outcomes tends to be stickier, less reflexive and more informationally driven. 

In prediction markets, this distinction is crucial because open interest is not leverage. It is capital explicitly committed to unresolved outcomes. 

Every open contract is fully collateralized upfront. Open interest simply represents the total dollar amount locked into active markets, sitting directly in the order book and remaining there until reality resolves the trade. There are no margin calls, no hidden notional and no leverage-multiplying exposure. 

That single structural feature explains almost everything about liquidity, price behavior, and why these markets remain remarkably clean under stress. 

(Source: Paradigm Dashboard)
 

Day-to-day trading activity volume remains heavily concentrated in crypto and sports. But according to Paradigm metrics, looking through the lens of open interest - where capital chooses to stay committed - paints another picture entirely. 

Across Polymarket and Kalshi combined, politics and macroeconomics account for 41.2% of total open interest, roughly $376.7mn out of $914.4mn, despite representing only 14.78% of traded volume on average over the past three months.  

The concentration is primarily led by Polymarket, as roughly 50% of Polymarket’s total open interest - about $204.7mn out of $437.1mn - is parked in political and macroeconomics-tied markets. These are long-dated positions, held through uncertainty, often functioning as structural option-like hedges to very specific outcomes. 

Surprisingly, a meaningful share of Kalshi’s capital is tied to non-sport outcomes. The latter still shows open interest dominated by sports at 49.19% (roughly $234.8mn), consistent with its outsized sports trading volume, but 36.04% (around $172.0mn) is committed to macro and political events. 

Under that structure, both sides of the same coin live under the same roof. Short-term risk expression and longer-term probabilistic hedging are both contributing to the adoption of prediction markets through different mechanisms.  

Volume concentrates momentum and attention. Open interest absorbs uncertainty. 

This is where prediction markets diverge most sharply from traditional financial markets. In traditional markets, open interest can explode even when capital is not moving. Stress triggers deleveraging, and bids disappear when they are needed most. 

In prediction markets, open interest is capital, and stress does not drain activity - it creates new questions to trade, and the same volatility that breaks liquidity elsewhere often deepens it in these markets.

At the edge of legitimacy

Despite rapid growth and rising institutional interest, prediction markets remain structurally constrained by their proximity to gambling. The line between pricing outcomes and wagering on them is still being actively contested, and in several US states, that distinction is increasingly being drawn against the platforms. 

Recent court actions highlight the model's fragility. Polymarket has moved to block enforcement efforts in Massachusetts, challenging the state’s attempt to classify its event contracts as illegal gambling. Kalshi has faced similar pushback, with state courts ruling that sports-linked contracts fall under local gaming laws unless explicitly licensed. 

At the core of these disputes is not technology or settlement mechanics, but economic substance. When users put capital at risk on the outcome of a sporting event, state regulators argue the activity looks indistinguishable from sports betting, regardless of whether it is framed as a financial contract or a prediction market. 

This legal ambiguity reinforces a key limitation of today’s prediction markets: their strongest sources of volume - sports betting - are also the most vulnerable to gambling classification, while longer-dated political and macro markets, where open interest concentrates, face fewer challenges but attract less day-to-day activity. 

Yet even as state-level pressure builds, institutional actors continue to step in. 

Liquidity providers and trading firms are positioning themselves deeper within prediction market infrastructure, signaling that capital is increasingly willing to look past near-term legal noise and focus instead on market structure, liquidity design, and long-term adoption potential.