Is the prediction market an extended form of binary options?

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After paying attention to the prediction market, I increasingly find that it is quite similar to binary options in many ways. Although not identical, from a certain perspective, the prediction market can be seen as an extension of binary options.

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

The core of binary options is also based on predictions of “yes/no” or “occurrence/non-occurrence.” For example, a binary options contract might stipulate: if Tesla's stock price is above a certain level on the expiration date, a fixed amount (such as $1) will be paid; otherwise, $0 will be paid. This essentially prices the probability of an event. In other words, it is essentially a predictive behavior regarding future events. Some financial players use binary options in practice as tools for predicting financial events.

In simple terms, both estimate the probability of future events occurring through market prices (a contract price of 0.6 means the market believes the probability of the event occurring is 60%), 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 and can include any verifiable events, such as weather/movie box office and other non-financial events, with more flexibility in event duration. Binary options mainly focus on price predictions of financial assets, such as forex/stocks/commodities, typically with shorter expiration times (minutes/days).

In terms of market liquidity and depth, binary options are more speculative and gamble-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 real information.

Finally, in terms of regulation and legality, binary options are considered high-risk financial products in some countries (such as certain regions of the EU), subject to strict regulation, and in some places, participation is not allowed (due to their gambling nature); in the United States, trading can only occur through exchanges regulated by the CFTC (Commodity Futures Trading Commission). Currently, cryptocurrency prediction markets are still in their early stages, and regulation is not yet clear. In the future, due to “manipulation events” or others, they may gradually come under regulation.

These differences may lead prediction markets down different paths, and there will also be variations in future regulation.