After paying attention to prediction markets, I increasingly find 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 seen as an extended form of binary options.

Prediction markets, such as Polymarket/Kalshi/Opinion, use yes/no binary contracts. The prices reflect the market's consensus on the probability of an event occurring, such as predicting "Will BTC exceed $100,000 in January 2025?" The price fluctuates between 0 and 1, with the real-time price reflecting 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% chance it will happen. At expiration, the settlement is based on the outcome: if it occurs, it is worth 1; if it does not, it is worth 0. Doesn't this seem very similar to binary options?

The core of binary options is also based on "yes/no" or "occurs/does not occur" predictions. For example, a binary options contract might stipulate that if Tesla's stock price is above a certain level on the expiration date, a fixed amount (like $1) will be paid; otherwise, $0 will be paid. This is essentially pricing the probability of an event. In other words, it is also a form of predicting future events. Some financial players use binary options as tools for predicting financial events in practice.

In simple terms, both estimate the probability of future events occurring through market prices (a contract price of 0.6 means the market believes there is a 60% chance of the event occurring), both aggregate the wisdom of many participants in the market, and allow participants to speculate (bet on the outcome of events) or act as a risk hedge. Binary options are like a financialized version of prediction markets.

There are also some differences.

Prediction markets have a broader scope, including any verifiable events, such as weather or movie box office results, and the range of events is more flexible. Binary options primarily focus on predicting the prices of financial assets, such as foreign exchange, stocks, and commodities, and usually 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 brokers; 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 real information.

Finally, regarding regulation and legality, binary options are considered high-risk financial products in some countries (such as certain regions of the EU) and are strictly regulated, with some places even prohibiting participation (due to their gambling nature); in the U.S., trading can only occur through exchanges regulated by the CFTC (Commodity Futures Trading Commission). Currently, crypto prediction markets are still in their early stages, and regulation is not yet clear; they may gradually come under regulation due to "event manipulation" or other issues in the future.

These differences may lead prediction markets down different paths, and there will likely be different regulatory approaches in the future.

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