Bitwise: Analysis of the Five Key Questions in Market Prediction

Author: Matt Hougan, Chief Investment Officer at Bitwise; Translated by Jinse Finance Claw

Prediction markets may look like gambling, but they could end up becoming one of the most important tools in modern finance.

A few weeks ago, Bitwise filed an application for a prediction markets ETF. Since I wrote about the Iowa Electronic Markets during my college years, for decades I’ve been fascinated by prediction markets. I believe prediction markets have profound significance for both policymaking and portfolio management.

But after filing the application, I discovered that not everyone agrees with this view. In my career, the opposition this application faced was almost more than any other initiative. That’s why I’m going to confront these most fundamental questions head-on.

Note: Due to restrictions under U.S. Securities and Exchange Commission (SEC) rules, I can’t discuss the application documents themselves, but I can discuss the general landscape of prediction markets.

1. Aren’t prediction markets just gambling?

Sometimes, yes—but not always.

Prediction markets that involve predicting the outcomes of sports events are, functionally, equivalent to sports betting, and I classify them as gambling.

But prediction markets about whether the Federal Reserve will raise or cut rates are, functionally, no different from the federal funds futures market on the Chicago Mercantile Exchange (CME). This is a market worth tens of trillions of dollars, and many major global financial institutions use it to hedge interest-rate risk—so I classify it as investing.

We don’t have to think of prediction markets as a single whole. We’re fully capable of making distinctions—such as separating markets tied to gross domestic product (GDP) from those tied to Taylor Swift concert ticket sales.

2. How should we think about prediction markets tied to election outcomes?

Election outcomes can significantly impact the markets through many channels, including tax policy, trade policy, regulatory rules, government spending, and more. In my view, hedging and investing around these outcomes is an important, investment-oriented use case.

This point is especially personal for me, because crypto has historically been highly sensitive to changes in election outcomes and regulatory policies. If we can hedge these risks, it would be immensely beneficial!

But it’s not limited to crypto either: imagine wealth management clients whose large holdings are concentrated in industry sectors sensitive to trade policy or fiscal spending, or corporate finance executives trying to manage risk exposures caused by shifts in regulatory policy.

For decades, hedge fund investors have been doing “macro trades” around elections and regulatory dynamics. Prediction markets simply make this kind of trading more direct and easier to execute.

3. But prediction markets are zero-sum games—investors could lose everything!

That’s certainly true, and this is crucial. Prediction markets are different from stocks and bonds: it isn’t reasonable to just hold prediction market contracts as a portfolio.

But many practical financial tools operate on zero-sum logic. Large markets like futures contracts and foreign exchange trading rely on paired long and short positions—these are important instruments investors use to hedge or invest for specific scenarios. Nobody would think it’s absurd for hedge funds to buy gold or Nasdaq-100 index options.

4. Are prediction markets harmful to society? Unlike investing in stocks and bonds, they don’t send money to valuable companies.

I strongly disagree. Prediction markets have the potential to significantly improve the quality of information that investors—and even society as a whole—receive about major events. Better information leads to more informed decisions, which in turn enables more efficient capital allocation.

This isn’t just theoretical. A recent Federal Reserve research report shows that Kalshi, the largest prediction markets platform under federal oversight, since 2022, has accurately predicted the trajectory of the federal funds rate ahead of every Federal Open Market Committee (FOMC) meeting. This perfect record is something neither the New York Fed’s Survey of Market Expectations nor federal funds futures were able to achieve. On macro indicators like the Consumer Price Index (CPI), Kalshi’s predictions also match Bloomberg’s consensus predictions or even perform better. The key is that Kalshi can update the probability of events in real time, something traditional surveys can’t do. The report notes that this kind of data is extremely valuable for both researchers and policymakers.

I’ve noticed that even people who are skeptical about prediction markets refer to its data. That alone proves the value of the data—these days, the data is integrated into the Bloomberg Terminal, frequently appears in U.S. CNBC coverage, and is widely cited by Wall Street analysts.

5. How should insider trading issues be addressed?

Insider trading must never be tolerated in any market. When there were reports of insider trading in prediction markets, I was deeply concerned—just like everyone else—and the issues at hand are supposed to be and are currently under investigation.

But there are bad actors in the market, and we should push for stricter regulatory enforcement rather than shutting down the entire market. Otherwise, we wouldn’t have stock markets, or any markets at all.

What matters is that prediction markets platforms such as Kalshi are regulated by the U.S. Commodity Futures Trading Commission (CFTC), and they must establish monitoring mechanisms to guard against manipulative trading. Liquidity providers such as Citadel Securities and Susquehanna participate as well, adding professionalism to the price discovery process.

As prediction markets develop, I expect regulatory scrutiny and enforcement to increase in step. This is reasonable, and it’s the necessary path for all financial markets to mature.

Addendum: Why do we need a prediction markets ETF?

The reasons are identical to how the Bitcoin ETF came about.

Before the ETF launched, investors already had multiple ways to invest in Bitcoin: self-custody, buying through exchanges, and participating in private fund investments. But the ETF launch allows all investors to access Bitcoin conveniently, so it can be included alongside other assets in portfolios and in the broader financial system, while also enjoying all the advantages of regulated products.

Prediction markets are the same. As policy and macro events increasingly affect investors, a prediction markets ETF will help investors adjust their portfolio allocations more easily.

Conclusion

Until the ETF approval results are released, we will continue to publish more content about prediction markets. Meanwhile, when I want to anticipate where global developments are headed, I’ll closely follow prediction markets data. Perhaps that’s enough to demonstrate its value.