In a Down Crypto Market, Does Investing in Prediction Markets Make Sense?

Buying spot market assets and holding them is almost always the better move.

With crypto in a bear market, some crypto investors are looking for alternatives. Prediction markets are one option. On Kalshi, it's possible to buy contracts that pay out if a specific outcome occurs, including those tied to a given cryptocurrency's price on a given date.

Kalshi also lists perpetual futures for Ethereum (CRYPTO: ETH) , XRP (CRYPTO: XRP) , and a dozen other coins, and to many investors, getting paid for a correct prediction sounds like a cheaper way to earn a return than buying and holding. But does that actually make sense, or is there a flaw in the logic?

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Outcome markets are simple on the surface, but they're actually very complex (thus, risky and often frustrating for individual investors) to trade.

Every event contract is priced somewhere between $0.01 and $0.99. The price asked per contract is determined by the crowd's estimate of the event's odds of occurring. Buying a contract at $0.25 means risking $0.25 to make $0.75; with a contract price of $0.70, $0.70 is at risk to make just $0.30. Higher probabilities make for lower returns.

That ceiling is the trouble with replacing crypto-market investments with prediction-market bets.

If, for instance, Ethereum triples in value during the next three years, whoever owns the coin directly will capture the threefold return in their account. On the other hand, whoever bought a prediction market contract for Ethereum to be "above $2,500 by December" will collect $1 per contract they bought for a bit less than $1.