After paying attention to prediction markets, I've increasingly found that they are quite similar to binary options in many ways. Although they are not exactly the same, from a certain perspective, prediction markets can be considered an extension of binary options.
Prediction markets, such as Polymarket, Kalshi, and Opinion, all use yes/no binary contracts. The price reflects the market's consensus on the probability of an event occurring. For example, predicting whether "BTC will break $100,000 in January 2025," the price fluctuates between 0 and 1. The real-time price reflects the market's consensus on the probability of the event occurring; if the price is 0.7, it means that people in the market believe there is a 70% probability that it will happen. At expiration, settlement is based on the outcome: if it occurs, it's worth 1; if it doesn't, it's worth 0. Doesn't this look a lot like binary options?
The core of binary options is also based on the prediction of "yes/no" or "occurs/does not occur." For example, a binary option contract might stipulate that if Tesla stock price is higher than a certain level on expiration date, a fixed amount (such as $1) will be paid; otherwise, $0 will be paid. This is essentially pricing the probability of an event. In other words, it is essentially a form of predicting future events. Some financial players use binary options in practice as a tool for predicting financial events.
In simple terms, both binary options estimate the probability of future events by using market prices (a contract price of 0.6 means the market believes the event has a 60% probability of occurring), pool the wisdom of many market participants, and allow participants to speculate (bet on the outcome of the event) or use them as a risk hedge. Binary options are like a financialized version of the prediction market.
There are also some differences.
Market prediction has a broader scope , encompassing any verifiable event, such as non-financial events like weather or movie box office figures, and its event span is more flexible. Binary options primarily focus on predicting the prices of financial assets , such as forex, stocks, and commodities, and typically have short expiration times (minutes/days).
In terms of market liquidity and depth, binary options are more speculative and gambling-like, with liquidity depending on brokers; prediction markets emphasize the accuracy of event predictions , even outperforming polls (after all, participating with real money is different), and incentive mechanisms encourage the input of real information.
Finally, regarding regulation and legality, binary options are considered high-risk financial products in some countries (such as parts of the EU) and are subject to strict regulation , with some areas even prohibiting participation (due to their gambling-like nature). In the United States, trading requires an exchange regulated by the CFTC (Commodity Futures Trading Commission). Currently, the cryptocurrency prediction market is still in its early stages, and its regulation is not yet clear. It may be gradually brought under regulation in the future due to "manipulation incidents" or other factors.
These differences may lead prediction markets down different paths and result in different regulatory approaches in the future.
