Prediction Markets Inflict Deeper Losses

Lead paragraph

Prediction markets are producing materially larger median losses for retail participants than traditional sportsbooks, according to a Citizens JMP report published on March 25, 2026. The report identifies a median retail drawdown of 28% on decentralized and centralized prediction platforms versus 14% on regulated sportsbooks, a gap of 14 percentage points that the authors attribute primarily to counterparty composition and market microstructure (Citizens JMP, Mar 25, 2026; Coindesk, Mar 25, 2026). Retail participation remains substantial — approximately 65% of active accounts on the sampled prediction platforms — but those accounts encounter counterparties that are more heavily capitalized and algorithmically sophisticated. The divergence in outcomes is not just a consumer protection issue; it surfaces broader questions about liquidity provision, information asymmetry, and market design in nascent crypto-native wagering markets. This article parses the data, compares year-over-year trends, and assesses implications for platforms, regulators, and institutional allocators.

Context

Prediction markets have evolved from academic curiosities into tradable marketplaces spanning politics, macro indicators, and crypto-native events. The Citizens JMP report (Mar 25, 2026) evaluated a cross-section of on-chain and off-chain prediction platforms covering the period Jan 2024–Dec 2025 and found systematic differences in retail outcomes versus analogous sportsbook bets. Historically, sportsbooks have benefited from mature risk management, regulatory oversight and predictable vig structures; prediction markets, by contrast, have heterogenous fee models, variable liquidity, and a higher incidence of professional counterparties using automated strategies. Those structural differences matter: when counterparties are concentrated among sophisticated liquidity providers, retail flow is executed into adverse selection rather than diffuse house risk, increasing realized retail losses.

The historical record offers precedents. Betting exchanges in the 2010s narrowed the margin between casual bettors and professionals but still exhibited adverse-selection dynamics once professional market makers optimized. Prediction markets in the crypto era compress settlement windows and permit high-frequency position-taking, amplifying the advantage of better-funded counterparties. Citizens JMP documents an increase in median retail losses of about 8 percentage points compared with the 2023–24 baseline, a trend the authors link to larger professional pools and faster execution technologies (Citizens JMP, Mar 25, 2026). For institutional observers, this is indicative of a maturation cycle in which structural innovation yields new frictions that favor capital and speed.

Regulatory attention is growing. On March 25, 2026, Coindesk highlighted the Citizens JMP findings, underscoring consumer-protection concerns in unregulated parts of the market (Coindesk, Mar 25, 2026). Policymakers in several jurisdictions have signaled interest in parity between conventional gambling regulation and novel prediction products, particularly where fiat rails and on-chain rails intersect. The combination of concentrated liquidity, algorithmic counterparties and the cross-border, pseudonymous nature of many platforms complicates enforcement but creates clear policy levers — disclosure, solvency requirements for market makers, and standardized reporting — that could change economic incentives if implemented.

Data Deep Dive

Citizens JMP’s primary metrics center on median loss per active retail account, share of volume by account type, and liquidity concentration. The headline: median retail loss of 28% on prediction markets versus 14% at sportsbooks over the study window (Citizens JMP, Mar 25, 2026). The report also finds that 70% of available liquidity on the sampled prediction platforms is provided by professional accounts or automated market makers, and that retail accounts contributed about 65% of unique volume but only 35% of liquidity provisioning. That mismatch creates a structural two-tier market: retail on one side of the book, capitalized professionals on the other.

Time-to-settlement and tick frequency were identified as key amplifiers. Platforms with settlement horizons under 72 hours and sub-second tick updates showed retail loss rates that were 6–9 percentage points higher than platforms with longer horizons. Citizens JMP quantifies that retail win-rate declines as a function of increasing tick velocity; platforms registering more than 1,000 ticks per minute during major events correlated with elevated retail drawdowns (Citizens JMP, Mar 25, 2026). The implication is straightforward: faster markets reward speed and capital; they penalize slower, smaller actors.

Comparisons versus peers and benchmarks are illuminating. When benchmarked to sportsbook outcomes for comparable events (e.g., political outcome X occurring with implied probability Y), sportsbooks delivered a median return profile roughly 40–50% better for retail bettors than prediction markets. Relative to historical betting exchange data (2018–2021), prediction markets today show an increased adverse-selection slope, suggesting that the interplay of on-chain execution and concentrated liquidity has accelerated the commoditization of retail flow into professional alpha-capture strategies.

Sector Implications

For platform operators, the Citizens JMP findings surface a trade-off between depth and inclusivity. Deeper order books delivered by professional market makers improve price continuity but also entrench professional advantage and can deter new retail entrants when realized losses become publicized. Some platforms have begun experimenting with tiered pools — segregating novice retail liquidity into protected books with capped exposure to high-frequency counterparties — but those designs can reduce overall market efficiency and increase spreads. Operators must balance user acquisition against adverse-selection feedback loops; the short-term growth play of subsidizing retail flow could translate into reputational risk and regulatory scrutiny if retail outcomes remain poor.

For institutional liquidity providers and trading firms, the market is increasingly fertile. Citizens JMP estimates that professional participants captured an outsized share of net profits in 2025: the top 10% of accounts accounted for roughly 60% of realized gains on prediction platforms. That concentration suggests scalable alpha opportunities for firms that can deploy capital and latency advantages while managing regulatory risk and counterparty exposure. Yet the business model is not without operational hazards; settlement finality on-chain and custody risks elevate operational risk relative to traditional OTC or exchange market-making businesses.

Regulators and venue-design advocates will likely focus on disclosure, solvency and execution fairness. Potential interventions include mandatory pre-trade liquidity disclosures, limits on matched principal trading against retail customers, and audit trails for algorithmic market makers. Any regulatory action will need to differentiate between prediction markets that function like betting venues and those structured as financial derivatives, a distinction with meaningful legal and supervisory consequences. The Citizens JMP report provides a data point that could catalyze such debates, particularly in jurisdictions where cross-border consumer harm is evident.

Risk Assessment

Principal risks identified by the data are threefold: adverse selection, concentration risk, and settlement risk. Adverse selection arises from asymmetries in information and execution speed; Citizens JMP’s 14 percentage-point gap versus sportsbooks quantifies the current extent of that problem (Citizens JMP, Mar 25, 2026). Concentration risk is material: when 70% of liquidity is controlled by a small cohort of professional entities, a single liquidity provider’s withdrawal could widen spreads and increase volatility, thereby amplifying retail losses in short windows. Settlement and custody risk on-chain—smart contract bugs, custodial failures, or bridge insolvencies—represent non-traditional vectors for loss that do not exist in regulated sportsbook environments.

Liquidity shocks pose second-order systemic risks. The report documents episodes in Q3–Q4 2025 where concentrated market maker withdrawals led to 40–120% increases in realized bid-offer spreads during high-profile political events. That creates temporal windows where retail participants, lacking the ability to time executions, realize outsized losses. For institutional participants, the operational contingency needed to mitigate such events—capital buffers, multi-venue access, and hedging strategies—are both costly and complicated by the fragmented nature of prediction markets.

Counterparty credit is another concern. Unlike licensed bookmakers with regulated capital requirements, many prediction market counterparties operate with minimal disclosure. Citizens JMP calls for stress-testing and minimum capital standards for on-platform market makers; absent such safeguards, platform-level insolvency or counterparty failure could translate into direct losses for users and reputational damage for venues. For institutional allocators assessing market-access strategies, those structural risks should be weighed alongside return asymmetries.

Fazen Capital Perspective

At Fazen Capital we view the Citizen JMP findings as a signpost of maturation rather than a terminal indictment of prediction markets. The 14 percentage-point gap in median retail losses relative to sportsbooks (Citizens JMP, Mar 25, 2026) highlights market-design choices that can be corrected through policy and engineering. A contrarian, non-obvious implication is that better-aligned liquidity provisioning — for example, regulated professional pools with transparency mandates and time-weighted participation — could both preserve market efficiency and reduce retail harm. This would create a bifurcated market structure: highly liquid, capitalized pools for institutional flow and protected, educationally oriented pools for retail customers.

We also see an arbitrage of attention for institutional investors. As markets mature and regulatory frameworks become clearer, bespoke market-making services and technology stacks that offer transparent risk accounting could capture spread economics without engaging in predatory strategies. That positions these markets as potential venues for risk-hedging and event-driven strategies that complement rather than replace traditional derivatives. However, scale matters: execution quality, custody arrangements and regulatory clarity will determine whether those opportunities are durable.

Finally, the data argue for active monitoring rather than binary judgments. Year-over-year increases in median retail losses (Citizens JMP notes an ~8 percentage point rise versus the 2023 baseline) should prompt iterative fixes—disclosure, settlement reform and market-maker accountability—rather than immediate prohibition. Thoughtful reform could preserve the informational benefits of prediction prices while reducing the distributional harms the Citizens JMP report documents.

FAQ

Q: How do prediction markets compare to sportsbooks on fees and margins?

A: Fees differ by venue; Citizens JMP reports effective retail cost (fees plus adverse selection) that is roughly double on average for prediction markets versus sportsbooks — consistent with the median loss differential of 28% vs 14% (Citizens JMP, Mar 25, 2026). Sportsbooks typically implement fixed vig structures and regulated capital buffers, which compress retail realized losses versus variable liquidity-driven pricing in prediction markets.

Q: Have similar gaps existed historically in other markets?

A: Yes. Betting exchanges and nascent FX venues in the past showed similar initial widening of retail losses as professional liquidity and algorithmic trading scaled; over time, better disclosure, split pools and market-making obligations narrowed those gaps. The current prediction-market dynamic follows that historical arc but is accelerated by on-chain settlement and sub-second execution.

Bottom Line

Citizens JMP’s March 25, 2026 report quantifies a material retail shortfall in prediction markets — median retail losses of 28% versus 14% at sportsbooks — driven by concentrated, better-capitalized counterparties and fast execution dynamics. Policy fixes and market-design evolution could reduce the gap, but the current landscape favors capital and speed.

Disclaimer: This article is for informational purposes only and does not constitute investment advice.