Prediction markets are rapidly shifting from a niche sideline to a new asset class with monthly volumes around $10 billion, US bank Citizens said. Although small next to the more than $10 trillion in US stocks, they are growing fast as platforms like Robinhood (HOOD), Kalshi and Polymarket.
The bank said these markets address a core flaw in traditional finance by letting investors act directly on events such as inflation numbers, election results, Federal Reserve decisions and regulatory approvals, rather than relying on blunt proxies such as futures, exchange-traded funds (ETFs) or single-name stocks.
Robinhood’s acquisition of derivatives exchange MIAX is seen as an important step toward vertical integration and deeper ties with institutional investors, positioning event contracts as a bridge between retail and professional liquidity, analysts led by Devin Ryan wrote.
While regulatory uncertainty, fragmented rules and thin liquidity remain risks, the analysts said prediction markets are already proving more responsive than polls or price proxies around the US election and bitcoin ETF Approvals. The markets’ probabilities are likely to be plugged into quant models, risk dashboards and corporate planning, they said.
Over time, analysts see these contracts evolving into a common tool for hedging, speculation and information, with the potential to support an annual multitrillion-dollar market as institutional participation increases.
So far, adoption is skewed to retail users, both because the contracts are easier to understand than many derivatives and because sporting events have been a natural run-on, the report noted.
But as liquidity grows, market makers deepen their presence and spreads tighten, the bank expects institutional investors to move in.
Event-driven hedge funds could use prediction markets around M&A, litigation and regulatory milestones. Macro funds can lean on CPI surprise markets, election odds and geopolitical contracts as targeted hedges.
Quant companies could treat prediction markets as high-frequency data feeds that map shift probabilities to price movements across stocks, currencies and commodities. Corporate issuers can monitor these markets to time capital raisings or assess the likelihood of regulatory changes affecting their business, the report added.
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