The Rise of Prediction Markets: How Crypto Options Find Product-Market Fit

December 11, 2025 (1mo ago)

From the periphery to the mainstream: The explosive growth of the prediction market in 2025

In 2025, a financial experiment once considered "fringe gambling" is becoming the hottest sector in the crypto industry. Prediction market platform Polymarket has accumulated a trading volume of over $36 billion in just two years, with its valuation soaring from zero to $12-15 billion. Its competitor, Kalshi, more than doubled its valuation in just a few weeks, jumping from $5 billion to $11 billion, with a $1 billion funding round co-led by Sequoia Capital and CapitalG.

Even more noteworthy is Google's announcement in early 2025 that it would directly integrate real-time data from Polymarket and Kalshi into its search engine and financial products. This landmark move signifies that the "predictive probabilities" generated by mass trading are being recognized as a new and valuable type of financial infrastructure data—just like stock prices or economic indices. Bernstein analysts point out that prediction markets are transforming into comprehensive information hubs encompassing sports, politics, business, economics, and culture.

Behind this dramatic shift lies a fundamental question: Why will prediction markets be able to achieve Product-Market Fit (PMF) by 2025? What are the essential differences between them and traditional options? And why has cryptography become the catalyst for all of this?

Predicting the nature of markets: Redefining binary options

Mechanism Deconstruction: From Probability to Contracts

The core mechanism of prediction markets is not complicated—it is essentially a type of binary option based on event outcomes. Users can place bets on events such as "whether Trump will win the election," "whether the Federal Reserve will cut interest rates," and "which country will be the next Nobel Prize winner." The platform forms a "market probability" based on the prices of the two parties involved in the transaction.

Typical prediction market contracts trade between 0 and 100 cents. If the event occurs, the contract is worth $1; if it doesn't, it's worth 0. The current trading price can be directly interpreted as the market's collective prediction of the probability of the event occurring—for example, if a contract predicting "Bitcoin will break $100,000 this year" is trading at 65 cents, it means the market believes there is a 65% probability of the event occurring.

Three key differences: Why not traditional derivatives?

Although prediction markets resemble options in form, they differ from traditional financial derivatives in three fundamental ways:

  1. Underlying asset characteristics: Discrete events vs. continuous prices

Traditional options are based on assets with continuous prices, such as stocks, foreign exchange, and commodities, allowing for continuous trading. In contrast, prediction markets rely on a finite number of discrete events in the real world—presidential elections every four years, the World Cup every four years, and the Oscars every year. The discontinuity and non-replicability of these events mean that prediction markets cannot maintain high trading volumes when there are no major events.

  1. Source of Value: Information Aggregation vs. Fundamental Analysis

The value of stock options stems from a company's intrinsic value—quantifiable fundamental factors such as future cash flows, profitability, and assets. The value of prediction markets, on the other hand, depends entirely on "interest in the outcome of the event itself" and the informational advantage of participants. As the Wharton School of Business Institute points out, "The power of prediction markets comes from their incentives for the disclosure of truthful information, for research and information discovery, and because the market provides an algorithm for aggregating opinions."

  1. Regulatory Framework: Information Derivatives vs. Financial Derivatives

Traditional options are subject to strict financial derivatives regulation, with standardized contract specifications and settlement mechanisms. Prediction markets have long existed in a regulatory gray area, with the CFTC classifying them as "gambling-like" rather than financial derivatives. It wasn't until 2025 that regulatory attitudes underwent a fundamental shift, with the founders of Kalshi defining this new category as "information derivatives"—a tool that allows investors to directly trade "what they believe will happen."

Duopoly: Two Paths to Product-Market Fit

Polymarket: A Decentralized Global Experiment

Polymarket represents a typical path for the crypto industry—decentralized, global, and permissionless. Built on the Polygon blockchain, the platform uses the USDC stablecoin for transactions and is open to users worldwide (except for a few countries such as the US, UK, and France).

The scale of the data is staggering:

Polymarket's business model is equally aggressive:Zero transaction feesThe platform generates revenue through market maker rebates and a potential token economic model, which significantly lowers the barrier to entry for users. More importantly, the platform's decentralized nature means that no single authority controls market creation or outcome determination—users can propose new markets on virtually any topic, from political elections to cryptocurrency price movements.

Regulatory Turning PointIn 2022, the CFTC fined Polymarket $1.4 million for "operating an unregistered event marketplace" and ordered it to block U.S. users. However, in 2025, the CFTC issued a "No-Action Letter," allowing it to reopen the U.S. market. This 180-degree turn signifies that the prediction market has moved from a "gray area" to "regulatory visibility."

Kalshi: Wall Street's Breakthrough in Compliance

Kalshi chose the exact opposite strategy—becoming the first prediction market exchange to receive full CFTC approval, bringing event trading under the same regulatory framework as futures and options.

The growth trajectory is even more astonishing:

Kalshi accepts USDC stablecoin deposits from Circle and uses Coinbase for custody. This natural fit with crypto infrastructure allows it to maintain its crypto-native advantages within a compliant framework. Its founders position the platform as the birthplace of "information derivatives"—a completely new asset class.

Giants enter the market: Competition intensifies

In the second half of 2025, the prediction market sector saw a wave of major players entering the market:

Behind this mass influx lies a consensus on a fundamental judgment:Prediction markets have found the true PMF.。

The three pillars of PMF verification

Pillar One: Regulatory Breakthrough – From Hostility to Support

The regulatory environment in 2025 has undergone a historic shift, which is a primary prerequisite for predicting the market to find the Product-Market Fit (PMF).

Key timeline:

Behind this shift lies a change in the political climate. Zach Hamilton (founder of crypto startup Sarcophagus) bluntly stated, "If you're looking for one reason why the crypto prediction market has returned to the US, it's the Trump administration—it's Donald Trump."

During Trump's second term, CFTC Acting Chair Caroline Pham showed greater support for prediction markets. Regulatory clarity not only eliminated compliance risks for platforms but also removed the biggest obstacle to large-scale capital intervention.

Pillar Two: User Scale – Real and Sustained Growth

Polymarket's user growth curve proves the existence of real demand:

More importantly, these users are not "wool-pullers" or bots—they are real traders betting real money. While a Columbia University research paper indicates that about 25% of trading volume may be wash trading, and this percentage can even soar to 60% during certain event weeks, the remaining real trading volume is still enough to support a business valued at tens of billions of dollars.

Pillar Three: Transaction Volume Verification – Billions of Dollars in Real Liquidity

The trading volume growth trajectory of the prediction market validates its Product-Market Fit (PMF):

Polymarket performance:

Kalshi's performance:

Industry as a whole:

These figures are not fabricated—they represent real money flows, real risk-taking, and real discovery of information value.

Encryption technology: the technological foundation of prediction market PMF

Why will the prediction market explode in 2025, rather than 10 years ago or 10 years from now? The answer lies in...Encryption technology provides four core capabilities that traditional financial infrastructure cannot offer.。

1. Smart Contracts: Automated Trust Machines

Traditional prediction markets (such as the now-defunct Intrade) require centralized institutions to manage funds, determine outcomes, and execute payouts. This not only increases counterparty risk but also significantly raises operating costs and regulatory complexity.

Smart contracts have revolutionized everything. On Polymarket, when an event concludes, smart contracts automatically execute payouts, completely eliminating the need for trusted intermediaries. Escrow services, result verification, and payout execution—the entire process is fully automated, immutable, transparent, and verifiable.

2. Stablecoin Settlement: The Unified Language of Global Liquidity

Almost all major prediction market platforms use USD-denominated stablecoins such as USDC as their settlement currency. This choice is crucial:

This globalization and immediacy of liquidity is something that traditional financial systems cannot provide.

3. Permissionless Market Creation: Unlocking the Value of Long-Tail Events

Polymarket's most disruptive feature is its open market creation mechanism—users can propose new prediction markets on virtually any topic. This unlocks enormous long-tail value: countless niche but valuable events, from "what words a company's CEO will say in an earnings call" to "when a certain game will be released," can be marketed.

This permissionless nature allows prediction markets to reach areas inaccessible to traditional financial derivatives. Countless events in reality possess informational value and generate trading demand, but because they are too niche or specialized, traditional exchanges do not create standardized contracts for them. Decentralized market creation mechanisms perfectly solve this problem.

4. Decentralized Authentication: Trust Guarantee for the Oracle Network

Determining the outcome of events is the core challenge of prediction markets. Traditional centralized platforms rely on manual judgment, which is prone to disputes and trust issues. Crypto prediction markets, on the other hand, use decentralized oracle networks (such as Chainlink and UMA) to verify event outcomes, and contract execution is triggered only after consensus is reached among multiple independent data sources.

This mechanism greatly enhances the objectivity and censorship resistance of the results, giving participants more confidence in the platform's long-term reliability.

Controversy and Challenges: Where are the Boundaries of PMF?

Despite the impressive data, prediction markets still face structural challenges that determine the true boundaries of their product-market fit (PMF).

Challenge 1: Low frequency of events – the ceiling is clearly visible

In a sobering analysis, IOSG pointed out the fundamental limitations of predicting markets:In the real world, events that truly garner widespread attention, have clear outcomes, and are settled within a reasonable timeframe are very limited.

The data confirms this:

This means that trading volume in the prediction market will inevitably fluctuate dramatically—soaring in election years and declining in ordinary years. This cyclical fluctuation is an underlying characteristic that cannot be changed by product design or incentive mechanisms.

Challenge Two: Disputes over data cleansing transactions – Data authenticity is in doubt

A research paper from Columbia University analyzed two years of historical data from Polymarket and found that:

This finding raises questions about the rationale behind market valuations. If nearly a quarter of the trading volume is fabricated, does the valuation logic based on volume multiples hold water?

Challenge 3: Diverse Liquidity – The Dilemma of the Long Tail Market

While prediction markets can theoretically cover an unlimited number of events, in practice, liquidity is highly concentrated. On Polymarket, most niche markets have extremely large bid-ask spreads, making it difficult to execute meaningful trades. This limits the platform's speed in moving towards its vision of "predictable everything."

Users are more willing to place heavy bets on high-profile events like the "final results," but are less likely to invest heavily in regular season games. This concentration of attention and capital is a structural problem that the prediction market must confront in the long term.

Traditional Options Markets: A Comparative Experiment in Parallel Universes

When discussing prediction markets, we cannot ignore another parallel market:Traditional cryptocurrency options marketThis market also experienced significant growth in 2025, but its PMF validation path was completely different.

Deribit: The Ruler of Centralized Options

Deribit is a leading global cryptocurrency derivatives exchange, specializing in options and futures contracts for Bitcoin and Ethereum. Its market position is virtually monopolistic.

Size Comparison: The True Ceiling of the Options Market

When we compare the crypto options market with the prediction market, an awkward fact emerges:

Crypto Options Market:

Predicting the market:

Surprisingly,The annualized trading volume of the prediction market is approaching the daily trading volume of the traditional crypto options market.This suggests that although prediction markets are "latecomers," their growth rate and user appeal may be surpassing traditional options.

Why is it faster to predict market growth?

There are three reasons behind this phenomenon:

  1. User experience that delivers a superior experience

Traditional options trading requires understanding complex concepts such as Greek letters (Delta, Gamma, Theta, Vega), implied volatility, and strike price. Even with beginner tools like Deribit's "Options Wizard," the learning curve remains steep.

Predicting markets minimizes complexity:Will Trump win the election? Yes or no.This intuitiveness allows millions of ordinary people who have never been exposed to derivatives to participate.

  1. Narrative Emotional Connection

Options trading is a purely financial instrument; traders are concerned with price, volatility, and time value. Predicting market movements is what traders are doing.The narrative of the event itselfYou're not betting on "Bitcoin's volatility," you're betting on "whether Bitcoin will break $100,000." This narrative creates a stronger emotional connection and motivation to participate.

  1. Viral spread on social media

Prediction markets are naturally well-suited for social media dissemination. A headline like "Market believes Trump has a 73% chance of winning" is more likely to generate discussion and sharing than "BTC $110K call option implied volatility rises to 50%." Polymarket's surge during the 2024-2025 US election was largely due to the widespread use of its prediction data by mainstream media.

Breakthrough Opportunities in On-Chain Options: The Next Battleground

Although prediction markets and traditional options appear to be competing in different sectors, they are actually evolving in the same direction:On-chain and Decentralization。

Current bottleneck: The dominance of centralized exchanges

Almost all crypto options trading still occurs on centralized exchanges (CEXs), with decentralized exchanges (DEXs) having virtually no presence in the options market. This contrasts sharply with spot trading—DEXs account for over 20% of spot trading volume.

Core issue:

Coinbase's acquisition of Deribit: A centralized counterattack

In 2025, Coinbase acquired Deribit, a move that sent a risk signal to foreign miners and decentralized fundamentalists—funds might be reluctant to be held in US-controlled entities. But from another perspective, this is precisely...Huge opportunities in on-chain optionsIt provides a trustless, censorship-resistant alternative.

BitVM and the Bitcoin Bridge: A Glimmer of Hope for Technological Breakthrough

The feasibility of on-chain options is improving, mainly due to:

These technological advancements are providing the necessary infrastructure for building attractive on-chain alternatives.

Five Endgame Patterns: The Potential for Valuation Models

How much value can the market ultimately hold? An in-depth study proposes five possible endgame scenarios, each corresponding to a different valuation level:

A. Event Derivatives Exchange

Valuation range: $5 billion - $15 billion

This is the current positioning – focusing on event trading, similar to a derivatives exchange for a specific product category. Polymarket and Kalshi are currently in this stage.

B. Parametric Insurance Infrastructure

Valuation range: $200-500 billion

The mechanisms of prediction markets are naturally well-suited for parametric insurance—automatic payouts triggered by verifiable events. For example, an automatic payout could be triggered for a flight delay exceeding four hours, eliminating the need for cumbersome claims processes. This application scenario could potentially open up the InsurTech market.

C. The Truth/Probability Layer in Decision-Making and Governance

Valuation range: $500-$1000 billion

When probability data from prediction markets is widely adopted as input for decision-making, it becomes the "layer of truth" for society. Businesses, governments, and organizations can make strategic decisions, allocate resources, and manage risks based on market forecasts. Google's integration of prediction market data is an early sign of this trend.

D. AI Probabilistic Data and World Prediction OS (WOS for AI)

Valuation range: $100 billion - $300 billion

AI systems need to make decisions based on probabilistic predictions of the future. Prediction markets can provide AI with real-time, market-validated probabilistic data—expectations for the future in various fields such as politics, economics, society, and technology. This is equivalent to building a "world state prediction operating system" for AI.

The integration of AI and prediction markets is beginning to emerge. Research shows that on platforms like Polymarket, AI-driven arbitrage strategies captured nearly $40 million in profits within a year, highlighting the significant potential for improving market efficiency. AI, as an efficient arbitrage hunter and ecosystem enabler, systematically improves market efficiency by uncovering market pricing errors and providing analytical tools.

E. ByteDance Model: Rebuilding All Businesses with "Prediction"

Valuation range: $300 billion+

The most imaginative endgame is a "prediction market version of ByteDance." Just as ByteDance used its powerful "recommendation algorithm" to reshape all internet businesses (news, video, e-commerce, search), prediction markets can theoretically use the ability of "prediction" to restructure multiple industries:

ByteDance has reached a market capitalization of $500 billion. If the market predictions actually come true, its valuation ceiling could be in the hundreds of billions of dollars.

Present and Future: From Speculative Instruments to Infrastructure

Current situation: Speculation-driven, but value has emerged

The current prediction market is still mainlySpeculation-drivenYes. Most users participate because they want to "make money" rather than "discover information." But this doesn't mean it has no social value—speculation itself is a mechanism for price discovery and risk transfer.

Data shows that predictive markets have surpassed traditional polls in accuracy in certain areas. In the 2024 US presidential election, Polymarket and Kalshi accurately predicted the results, while traditional polls were generally inaccurate. This proves that "voting with money" can indeed aggregate information more accurately than "voting with words."

Transformation Signals: The Path from the Edge to the Center

Several key signals indicate that the forecasting market is transforming from a "speculative tool" into a "financial infrastructure":

  1. Institutional funds enter the market.

Polymarket's investors include Peter Thiel's Founders Fund, 1789 Capital (in which Trump's eldest son has a stake), and ICE, the parent company of the New York Stock Exchange. Kalshi's investors include top-tier firms such as Sequoia Capital, CapitalG, a16z, and Paradigm. These institutions are clearly not betting on a short-term hype, but rather on a new asset class.

  1. Data integration into mainstream products

Google's integration of market prediction data into its search engine and financial products signifies that this data is recognized as a valuable source of information. This is similar to stock prices being integrated into news reports—no longer fringe data, but a crucial indicator for understanding the world.

  1. The strategic deployment of traditional financial giants

The Chicago Mercantile Exchange (CME Group)—the world's largest financial derivatives exchange—plans to launch contracts for sports and economic events by the end of 2025. This is a landmark signal that traditional finance is officially recognizing the value of predictive markets.

  1. Maturity of the regulatory framework

From the CFTC's shift in attitude, Kalshi's DCM license, Gemini's approval, to Robinhood's derivatives exchange plans, the regulatory framework is rapidly maturing. This lays the legal foundation for the long-term development of prediction markets.

Future Directions: Three Possible Evolutionary Paths

Path 1: Vertical Deepening – Focusing on Core Scenarios

Prediction markets may choose to focus on core areas such as politics, sports, and economics, becoming professional information platforms in these fields. This path corresponds to the positioning of an "event derivatives exchange," with a relatively clear valuation ceiling.

Path Two: Horizontal Expansion – Penetrating Insurance and Decision-Making

Through applications such as parametric insurance, enterprise-internal forecasting markets, and DAO governance forecasting, forecasting markets can expand into a broader B2B market. This path offers greater market potential, but it requires overcoming the current speculative nature of the consumer (C-end) market.

Path Three: Infrastructure Development – ​​Becoming the Probabilistic Data Layer in the AI ​​Era

The most radical vision is to become the "world state prediction operating system" for the AI ​​era. Each AI agent, when making decisions, needs to query the prediction market to obtain probability distributions about the future. This path corresponds to the highest potential valuation, but it is also the most difficult to achieve.

Conclusion: Product-Market Fit (PMF) has emerged, but the path remains unclear

The rise of the prediction market in 2025 is no accident. It has found three sufficient conditions for PMF:

  1. Regulatory BreakthroughFrom the gray area to legalization

  2. User authenticationHundreds of thousands of real active users

  3. Proof of Transaction VolumeBillions of dollars in real liquidity

Cryptographic technologies (smart contracts, stablecoins, decentralized verification) offer core capabilities that traditional financial infrastructure cannot provide, which is the fundamental reason why the market is expected to explode in 2025 rather than earlier or later.

However, the existence of PMFs does not equate to a predetermined endgame. Prediction markets still face structural challenges such as the low frequency of events, data authenticity, and fragmented liquidity. Their final form—whether it remains a "event derivatives exchange" or evolves into a "probabilistic infrastructure for the AI ​​era"—remains undecided.

But one thing is certain:Prediction markets are no longer a fringe experiment in finance, but a real, rapidly growing new market with disruptive potential.Whether it's Polymarket's decentralized approach, Kalshi's compliant approach, or the full-scale entry of giants like Coinbase, Gemini, and Robinhood, all are driving this market toward maturity.

For investors, traders, and industry participants, the question is no longer "whether the market will succeed," but rather "to what extent the market will succeed." The answer may need to be provided by the market itself—just as it predicts other events.

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