The Downsides of Prediction Markets

In the first two parts of this series, we stayed pretty friendly to prediction markets.

• We talked about how they express everything as a probability and how to convert those probabilities into moneylines.

• We looked at spots where they often beat or complement traditional sportsbooks on price or flexibility.

Today I’m going to flip it around.

I’ll highlight the drawbacks of prediction markets and the ways in which they lose out to traditional sportsbooks for most casual bettors.

I’ll specifically cover the following challenges:

1. Liquidity is often thin or lumpy.

2. Fees and duplicated markets can be confusing and erode profits.

3. You don’t get promos/boosts, which are a huge part of modern sportsbook EV for newer bettors.

After we walk through each one, I’ll close with our Bet(s) of the Week!

Let’s get after it.

Liquidity: The Ability to Bet Size at a Fixed Price

As long as you haven’t been “limited” for being too successful as a bettor, traditional sportsbooks offer a simple experience:

• You see a bet you like at -110.

• You type in $110.

• You get filled instantly (within your limits for that market), all at that price.

Prediction markets are not that simple.

They operate with an order book:

• There’s a stack of people wanting to bet “Yes” at different prices and sizes.

• There’s a stack of people wanting to bet “No” at different prices and sizes.

• The price and magnitude of your bet depends on what’s actually sitting there and how much you’re trying to get down.

That leads to one big issue.

The slippage problem

Example: Betting the Falcons to score under 20.5 points.

• You see a bet you love at 54% implied (roughly -120 with fees) for an NFL team total under.

• But there’s only $27 available at that price (see the far-right column above).

• The next best offers are $72 at 59%, $30 at 60%, etc.

If you slam in $200, you don’t really “get 54%.” You’re getting a blended, worse price as you chew through the book all the way up to 61% (meaning part of your bet is at -156).

On a sportsbook, you might just have:

• -125 available for your full stake, with clean sizing and no partial fills.

In that spot, “headline price” on the prediction market looks better, but your actual fill is worse once you get to a larger size (that is still pretty modest at $200).

Juice Reel can help you shop and find “great-looking” prices on prediction markets, but in some cases you can’t actually bet those numbers with meaningful stakes.

Confusing Markets and Fees

Unless you grew up trading futures or derivatives, the user experience on prediction markets is way more confusing than on retail sportsbooks.

Here are the two most confusing categories:

Market Duplication

For most sports bets I make on Kalshi, I see two markets representing the same bet, and they often show different prices (!!). WTF?

Here’s an example from tonight’s Trail Blazers vs. Pelicans game.

You can bet New Orleans to win on the moneyline by betting “Pelicans — Yes” at 39c with a limit order or 40c with a market order. Take a look:

Oddly, you can ALSO bet New Orleans to win on the moneyline by betting “Trail Blazers — No”. In this case, you get better pricing – 38c with a limit order and 39c at market.

What does this mean, you ask?

No one knows what it means (but it’s provocative)!

You’ll just need to check both markets to find the best price before placing your bet. I wish I had a better explanation.

Fee Complexity

Kalshi’s fee schedule is so complex, they need a seven-page PDF to explain it.

In short, you pay smaller fees when trading bets that are extremely likely or extremely unlikely to win ($0.07 per hundred contracts when trading at 1c or 99c).

You pay larger fees when trading on 50/50 bets ($1.75 per hundred contracts on coin flip bets).

You’ll also typically pay larger fees for market orders (that are filled immediately) than for limit orders (where you’ll need someone to meet your price).

The easiest way to understand fees is to hover over the question mark in that module before betting.

Here’s a visual showing the $1.42 in fees I’d pay for 100 contracts at 72c tonight:

Hopefully this is helpful in deciphering the strange user experience you may encounter.

No Promotions or Offers

Modern sportsbooks are basically two products:

1. The raw odds (which build in a moderate to large house edge).

2. The promos/boosts (which, if used well, can be very profitable).

Prediction markets do not run a business model that supports category 2.

No:

• Odds boosts

• Profit boosts

• Bet credits

• Risk-free-ish “bet & get” offers

• Insurance on parlays, etc.

For a sharp bettor with a serious edge, that’s fine.

For a recreational bettor who’s willing to be disciplined, it’s a big loss, as frequent promotions offer a lot of value when used well.

For readers of this newsletter who are not betting for consistent profit, the priority stack should be:

1. Crush promos and boosts intelligently on regulated books.

2. Line shop aggressively across books (including prediction markets).

3. Incorporate prediction markets as a niche tool where you have a pricing or market advantage.