Prediction Markets Raise Financial Concerns as Borrowing Fuels Trading

More than half of prediction market traders have executed positions with borrowed money, according to a new study that raises fresh questions about the rapidly expanding industry.

BadCredit.org recently surveyed 1,000 U.S. adults who are actively trading on prediction markets to gauge how they’re faring financially, how they fund their accounts, and their motivations for accessing the platforms.

The prediction markets study reveals an alarming reality: more than half (51%) of traders admitted to funding their accounts with borrowed money. Such funding sources include credit cards and debts that can accrue interest.

“Although tempting, borrowing money, whether with a credit card or taking out a loan to place a bet, is a universally bad idea,” said Erica Sandberg, a consumer finance expert at BadCredit.org.

Prediction markets are regulated as financial instruments by the Commodity Futures Trading Commission (CFTC). The trading exchanges hold Designated Contract Market (DCM) licenses from the federal agency.

Gamification of Prediction Markets

Prediction markets are not new, as the exchanges for decades have allowed farmers to hedge their annual crop and harvest yields against agricultural futures.

More recently, prediction markets have innovated to include binary yes/no contracts based on the outcomes of additional real-world events, from sports to who will be named Time’s Person of the Year. Prediction markets have been accused of gamifying their platforms, offering products that closely resemble gambling disguised as financial investing.    

BadCredit.org reports that 53% of prediction market users said they signed up primarily to make money, but 79% reported a net loss after one year of trading. Those who used borrowed money to trade were more likely to lose, with 88% of credit traders in the red.

“Our study found that nearly four out of five prediction market users lose money, and more than a quarter experience losses of at least $500,” Sandberg said. “If you’re like many Americans living within a tight budget, this kind of loss can make paying essential bills very difficult.”

Defying the data, the BadCredit.org survey found that 30% of prediction market traders still see the platforms as a way to improve their finances.

Sandberg stresses that prediction markets should be viewed similarly to going to a casino.

“There is nothing wrong with using these prediction markets as a form of entertainment,” Sandberg explained. “Only use cash you can afford to lose, and that won’t end up hurting your overall circumstances and end up as debt.”

BadCredit.org is an online resource where consumers with bad credit can learn how to make better credit decisions and access financial products for subprime borrowers.

BadCredit.org detailed that the survey’s margin of error for the full sample is approximately ±3.1 percentage points at the 95% confidence level. The margin of error for findings among prediction-market users is approximately ±8.0 percentage points.

Consumer Warnings

Casino.org reported this week on the Australian government warning the public to stay away from prediction markets. The report included a financial note from Bank of America expressing concerns that the rise of prediction markets could lead to increased consumer debt and bad loans.