Could Prediction Markets – Like Crypto – Be the Next Institutional Hedging Tool?
By Phillip Silitschanu, SVP of Digital Assets at Arcesium
A key factor that proves the marginal is becoming mainstream is institutional adoption. Robinhood, DraftKings, and Underdog are launching prediction market verticals, but aren’t considered true institutions of traditional finance (TradFi). However, users likely don’t realize that the underlying technology that powers most prediction markets is blockchain, the engine of decentralized finance (DeFi), which is rapidly gaining institutional adoption, led by products like stablecoins, tokenized assets and securities, and tokenized funds.
For institutional asset managers, prediction markets offer more than a speculative market to generate alpha on otherwise illiquid outcomes. They offer a way for firms across all industries to more precisely hedge and mitigate risk from unlikely future events. Demand is not the blocker for institutional acceptance of these markets, or, for that matter, blockchain in general. Regulatory clarity and technology infrastructure are the impediments, but it’s only a matter of time before they become the enablers.
Are prediction markets merely legalized gambling or sophisticated risk mitigation
Prediction markets and tokenization of real-world assets (RWA) have dominated the conversations at crypto-native and DeFi conferences this year and, most importantly, the SEC and CFTC are all aboard the prediction market train. Other compelling green lights are flashing, in the form of dollars. On May 7, Kalshi announced its $1 billion funding round and annualized trading volume of $178 billion.i After $60 billion in market volume was recorded year-to-date as of mid-April, it is forecasted to balloon at an 80% compound annual growth rate through 2030.ii However, prediction markets will emerge as much more than a casino that mediates bets between different traders.
These instruments have solid potential for the actual hedging against risk. An investment firm or a corporation will have more levers to pull and dials to turn to hedge against variable costs and impacts of fluctuating markets. For example, an airline could hedge not just against fuel prices, but also against variables like weather patterns and sporting event results that impact flight demand in specific cities.
The whole idea of hedging can become multi-dimensional. Further, the collection of millions of points of crowdsourced data daily could provide substantive fodder for forecasting analytics. That airline can analyze which cities it should book more often, considering numerous factors beyond demand signals, such as potential fuel cost spikes from military actions in foreign countries. Intercontinental Exchange recently partnered with Polymarket to launch a tool for institutional traders to consume crowdsourced probability assessments as market signals. Investment firms are increasingly looking to prediction markets in terms of hedging and risk mitigation, as well as alpha generation. While on the marquee now, the speculative aspect of predictive markets will end up being upstaged by less controversial use cases, similarly to how cryptocurrency will relinquish the headlines to stablecoins and tokenization in the long run.
Will DeFi ultimately absorb TradFi?
SEC Chairman Paul Atkins said in 2025 that the rapid advances in electronic trading and blockchain technology are driving the biggest transformation in the U.S. financial system in decades. He also proclaimed that our financial system will shift to tokenization within as little as two years.iii Some may label the chairman’s statement as hyperbole, but the notion that blockchain could remake our financial markets is not so outlandish. It could be five or so years before every investment asset, including all public equities, will be tokenized. Blockchain’s distributed ledger technology will be the great simplifier, in terms of secure recordkeeping, accelerated settlement times, and reducing counterparty risk. Firms will use its smart contracts with instant, immutable settlements to smooth out errant reconciliation workflows and reduce compliance costs.
But building the connectors between DeFi and TradFi is a long-tail construction project that poses challenges for data scientists, IT leaders, and asset managers champing at the bit to use them to drive returns. But fear not a glacial innovation cycle. The TradFi world operates on 5-to-10-year cycles while the crypto and DeFi space standardizes new concepts in 5 to 10 weeks.
Prediction markets bring more speed and greater volumes
As investment firms move towards this new reality, they must confront infrastructure barriers. A new category of event-driven instruments introduces challenges around valuation, risk aggregation, data integration, and accurate and compliant reporting. The sheer amount of data that will need to be ingested, reconciled, and analyzed on a daily basis would be astronomical, a prohibitively big job for human beings. It is not only a data quantity issue, however. Firms will need to make sense of fragmented data from public markets, private market asset classes, and digital asset classes. Asset managers will require robust infrastructure to ingest new data streams, standardize positions alongside traditional assets, and provide real-time risk. In the near future, a portfolio manager will have TradFi positions blending private and public assets, prediction market positions, and other DeFi positions using tokens both as cryptocurrencies and as securities simultaneously.
To move in this direction, firms need the capability to consolidate and normalize data from both TradFi and the crypto-native DeFi world into a single picture that is continuously updated. Blockchain introduces more speed and greater volumes – and longer business hours. Systems will need to keep up, recording complex lifecycle events and calculating profit and loss on both an historic and intraday basis.
Prediction markets are here to stay, but will evolve
Prediction markets are yet another convincing DeFi use case attracting TradFi players to its inherent speed, automation, and transparency. Approximately 40-50 asset management firms have inked deals with blockchain providers. In March, S&P Dow Jones Indices and Kaiko announced the tokenization of the iBoxx U.S. Treasuries Index, the first time that a major index provider made a financial benchmark available as a native digital asset on a blockchain. Milestones are occurring. Cornerstones are being laid. When regulatory clarity and infrastructures catch up with ambitions, we will see a shift toward a unified blockchain-based financial system. Firms that prioritize an asset-class-agnostic data foundation and think proactively about interoperability will be positioned to scale tokenized digital asset business lines along side any and all traditional asset classes.
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Phillip Silitschanu, SVP of Digital Assets at Arcesium, is a globally recognized strategy leader in the Traditional Finance and Blockchain industries, having led worldwide research and analysis teams on Blockchain, Digital Assets, Crypto/NFTs, and Web3 technologies and marketing strategies.
i https://www.nytimes.com/2026/05/07/business/dealbook/kalshi-fundraise-22-billion.html
