Would you place a $2,000 bet on the Bank of Canada hiking the interest rate for a chance at making an $8,000 profit?
Prediction markets — platforms where users bet real money on future events — are expanding in Canada. And as they draw growing interest from younger generations, regulators are taking notice.
Prediction markets allow retail investors — everyday, non-professional individuals — to buy stakes (technically called contracts) based on what they think the outcome of a certain event will be (typically a yes or no answer). Think “will this be the hottest summer on record?” or “will the S&P 500 go up?”
When you purchase a contract, you’re betting against other users — every dollar gained by one trader is a dollar lost by another.
For example, if you purchase a “yes” contract on a 20 per cent chance that the Bank of Canada will hike the interest rate, you would pay 20 cents. If the interest rate goes up, you get a dollar back, and if it doesn’t, you get zero. If you buy 10,000 “yes” contracts at 20 cents for $2,000, the payout could be $10,000, which means you’d make $8,000 in profit. Guess wrong, and you lose your $2,000.
Later this summer, when Wealthsimple launches a stand-alone app called Wealthsimple Predict in partnership with Kalshi, a U.S.-based prediction market exchange platform, it will be one of two companies registered to trade in prediction markets in Canada.
According to a June 18 blog post from Wealthsimple co-founder and chief product officer Brett Huneycutt, prediction markets are one of the fastest-growing segments in global financial markets; last year, they surpassed $51 billion (U.S.). This year, total market volume is expected to hit $240 billion and by 2030, more than $1 trillion.
Sentiments around prediction markets in Canada are mixed, with younger Canadians showing more interest. A recent study from CPA Canada found that one in three people aged 18 to 34 said they would participate in prediction markets if access expanded in Canada, while one in five considered prediction markets a type of investment.
At the same time, a CIBC poll found that 74 per cent of Canadians say prediction markets are more like gambling than investing, and 57 per cent say they should not be available on investment platforms.
As the prediction market industry grows, so does a fundamental question: is this investing, or is it gambling?
What are the rules and regulations around prediction markets in Canada?
The U.S. allows companies to offer contracts tied to sports, politics, entertainment (such as “what couple will win ‘Love Island?’ ”) and a wide variety of other events, but contracts in Canada are limited to economic indicators, financial markets and climate trends. Contracts must also have a minimum 30-day term to maturity.
Prediction markets in Canada are regulated by the Canadian Investment Regulatory Organization (CIRO) and Canadian Securities Administrators (CSA), and the framework continues to evolve.
“I think that regulators are doing the best they can in this situation,” says Marius Zoican, an associate professor of finance at the University of Calgary and Canada Research Chair in financial technology. “They’re keeping out the more egregious gambling-type of prediction markets: sports, politics and contracts that count how many times a celebrity says a particular word in a speech, which don’t have any sort of hedging value or economic content, so they shouldn’t belong on investment apps,” he explains.
In an email to the Star, CIRO and the CSA stated they encourage all investors to check the registration of any person or company offering investment products to Canadians. You can verify if a prediction market has been recognized as an exchange (or exempted from the recognition requirement) through your provincial securities regulator such as the Ontario Securities Commission.
Who wins the most with prediction markets — and who loses?
Simon Stern, a 37-year-old Toronto-based software engineer, believes prediction markets offer a more accurate view of public sentiment than traditional media. “I think if Canada wants to be at all competitive economically on the world stage, these are things we should take seriously.”
Stern has hosted three PredictTO meetups, where Torontonians — from crypto investors to hedge funders and lawyers — come together to discuss prediction markets. “It’s a really important way to get more legibility into the world around us,” he says.
Stern believes online casino-style gambling in Ontario is more predatory than prediction markets. “If you have this urge to bet and gamble, you may as well be doing it on economic indicators where you have to think about these things rather than playing Bejeweled.”
People who win with prediction markets are “very sophisticated at posting prices that are generally efficient,” says Charles Martineau, an associate professor of finance at the University of Toronto. There are also some users who are very good at finding underpriced contracts. “For that, you need to be very skilled,” he says. He adds that luck also can’t be ruled out. On the other hand, those who lose money tend to go for long shots.
Martineau says his fourth-year behavioural finance students show a lot of interest in prediction markets, which worries him. He tells his students that the best way to start investing is to buy an exchange-traded fund (ETF) that mimics the market to take advantage of compounding growth.
Jean-Paul Bureaud, executive director of FAIR Canada, which advocates for the rights of Canadian investors, says for most retail investors, prediction market trading is “closer to gambling,” as one study found that only the top one per cent of traders capture the overwhelming majority of the winnings.
One circumstance where prediction markets may be useful is hedging, a strategy where investors take a position that offsets a risk they hold elsewhere. However, Bureaud says a retail investor would have to buy the appropriate event contract to offset their risk, including the right amount of exposure, which requires a level of sophistication that many retail investors lack.
Luka Marjanovic, managing director and head of CIBC Investor’s Edge, points out that there are already other ways for investors to offset risk. “ETFs, options and regulated tools have good liquidity, which means low cost to enter and exit, and can provide some of those hedging functions today.”
In an email to the Star, Swapnil Parikh, vice-president of product at Wealthsimple, pointed out that prediction markets involve risk consistent with many modern financial tools including futures, options, leveraged products and more. “Several of the concerns raised can be said of financial markets broadly and not unique to prediction markets.”
To help clients make informed decisions about trading predictions, Parikh says education and risk disclosures (including the possibility of losing the full value of a position and the importance of only trading what you’re comfortable losing) are embedded throughout the Wealthsimple Predict experience. “Before anyone makes a single trade, the app runs them through a guided orientation with clear definitions, disclosures, and details on how and when contracts resolve,” he says.
Is trading on prediction markets a way to build wealth over the long-term?
The best way to look at investing is as a long-term exercise, Marjanovic says, whereas speculation is about chasing short-term outcomes. “Prediction markets are centred on the outcome of a single event at a single point in time, which doesn’t necessarily fit with investing philosophy.”
In his blog post for Wealthsimple, Huneycutt did point out that “a pure trading position offers no fallback if you lose” and “even for investors who use them as a hedging strategy … the insurance comes at a cost. All of which is why it’s so important to trade only what you are comfortable losing.”
“The biggest hazard is conflating the idea of prediction markets with investing,” Marjanovic says.
