After paying attention to prediction markets, I've increasingly noticed their similarities to binary options. While not exactly the same, from a certain perspective, prediction markets can be seen as 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 seem very similar to binary options?
The core of binary options is also based on "yes/no" or "occurs/doesn't occur" predictions. For example, a binary option contract might stipulate that if Tesla stock prices are 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 as a tool to predict financial events in practice.
Simply put, both use market prices to estimate the probability of future events (a contract price of 0.6 means the market believes the event has a 60% probability), both aggregate the wisdom of many market participants, and both allow participants to speculate (bet on the outcome of the event) or use it as a risk hedge. Binary options are like a financialized version of prediction markets.
However, there are some differences.
Prediction markets have a broader scope, including any verifiable event, such as weather/movie box office figures—non-financial events—and the event span is more flexible. Binary options primarily focus on predicting the price of financial assets, such as forex/stocks/commodities, and typically have shorter expiration times (minutes/days).
In terms of market liquidity and depth, binary options are more speculative and gambling-like, with liquidity depending on the broker; prediction markets emphasize the accuracy of event predictions, even outperforming polls (after all, participating with real money is different), and the incentive mechanism encourages the input of accurate 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, however, 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 due to "manipulation incidents" or other factors.
These differences may lead the prediction market down different paths and result in different future regulatory approaches.
