7 Mistakes New Users Make When Trading In Prediction Markets
In Brief
Prediction markets are growing in crypto, offering tools for forecasting events, but beginners often make avoidable mistakes such as treating them like gambling, ignoring liquidity, misreading probabilities, and more.
Prediction markets are quickly emerging as one of the most intriguing frontiers in crypto. From forecasting elections and inflation to predicting product launches and crypto regulation, these decentralized platforms allow users to trade on collective expectations.
But as with any new form of trading, the promise of easy profits attracts plenty of newcomers who misunderstand how these systems actually work.
Despite their rising popularity, a large portion of first-time traders fall into the same avoidable traps.
Here are the most common seven, and how to avoid them.
Treating Prediction Markets Like Casino Bets
Many new traders mistake prediction markets for a form of online gambling — an emotional bet rather than a data-driven forecast. The problem with this mindset is that it turns what should be a rational assessment of probabilities into a game of luck.
As economist Sam Hammond noted in a piece for Works in Progress, prediction markets remain smaller than they could be because too many participants treat them as betting sites rather than serious forecasting tools. He observed that the lack of savers and informed traders “makes these markets orders of magnitude smaller than sports betting,” reducing their accuracy and maturity.
The takeaway? In prediction markets, every price reflects an implied probability. You’re not gambling on outcomes — you’re estimating the likelihood of events. Treating it like a casino game ensures you’ll play against the odds, not with them.
Ignoring Liquidity and Market Depth
A major pitfall for newcomers is underestimating the importance of liquidity. Unlike stock exchanges, prediction markets can have thin trading volumes and wide bid-ask spreads. When only a handful of people trade a contract, even small orders can dramatically shift prices.
Low liquidity can distort true probabilities, making markets appear more confident in an outcome than they actually are. As Hammond also observed, many prediction markets “lack key features that make markets attractive” — including deep liquidity and diverse participation.
On platforms like Polymarket, for instance, popular political or macroeconomic events often see high volume and tight spreads, but niche topics (like “Will Ethereum ETF volume exceed Bitcoin’s by year-end?”) may trade thinly.
The solution: check market volume, open interest, and spread width before entering. Thin liquidity doesn’t just raise your costs — it can trap you in a position you can’t easily exit.
Misreading Market Prices and Probabilities
One of the most consistent beginner errors is misunderstanding how prediction markets encode probabilities. If a contract trades at $0.70, it doesn’t guarantee a 70% chance of success — it implies a collective forecast of that probability, which can shift rapidly.
A comprehensive review on ScienceDirect explains that, historically, prediction markets “exhibit lower statistical errors than professional forecasters and polls,” but that accuracy depends on informed interpretation.
Consider a market pricing “Trump to win the 2024 election” at $0.40. That doesn’t mean 40 cents profit or 40% certainty forever. It means that the aggregate view — at this moment — implies a 40% likelihood.
Traders often confuse this with fixed odds, buying or selling contracts without understanding that prices are dynamic forecasts, not locked bets.
Overlooking Platform and Contract Design Risks
Another critical oversight is neglecting how prediction market contracts are written and resolved. The entire market depends on how the question is defined and verified. A poorly worded or ambiguous contract can lead to disputes, reversals, or outright invalidations.
Academic research from arXiv points to recurring sources of forecast error in prediction markets — such as “market-maker bias” and “convergence error” — both of which can arise when contracts or pricing mechanisms are poorly structured.
This risk is amplified in decentralized crypto markets, where oracles (the external data providers that determine outcomes) can fail or be manipulated.
In 2023, several small-cap DeFi prediction platforms faced controversy when unclear event definitions led to conflicting payouts.
Before entering any market, new users should:
- Read the full event question carefully.
- Check how the outcome will be resolved (e.g., which data source or official report is used).
- Understand platform trust models — centralized (Kalshi) vs. decentralized (Polymarket).
Ignoring these details can mean losing funds even when your forecast is technically correct.
Failing to Manage Biases and Emotional Trading
Prediction markets aren’t just battles of data — they’re battles of human psychology. Studies have shown that participants often follow crowd sentiment or recent trends rather than objective reasoning.
Research by Bénabou and Tirole found that prediction-market traders often fall into “win-stay, lose-shift” patterns, chasing prior success or mimicking popular strategies rather than updating beliefs logically.
In the crypto world, this manifests as herd behavior: when a big influencer backs an outcome, traders rush in, driving prices away from true probabilities.
For example, during the 2024 U.S. elections, Polymarket volumes surged after viral posts, even though fundamentals hadn’t changed.
Avoiding emotional trading requires a few habits:
- Set predefined risk limits.
- Focus on evidence, not hype.
- Diversify across events rather than going all-in on one narrative.
Smart traders recognize that their biggest opponent isn’t the market — it’s their own bias.
Ignoring Trading Costs, Fees, and Spreads
Another silent profit killer is transaction cost. Prediction markets are often zero-sum, and once you add platform fees and bid-ask spreads, they can become negative-sum.
As Sam Hammond pointed out in his same Works in Progress essay, even the best-run prediction markets are “negative-sum after fees,” meaning that most participants lose money over time unless they’re consistently more accurate than others.
On platforms like Kalshi, every trade incurs a small transaction fee, while decentralized alternatives like Polymarket add network gas costs. Combine this with potential slippage (the difference between expected and executed price), and your winning trade may end up barely profitable.
New users should review platform fee schedules and factor in all costs before trading. A solid forecast can still yield poor results if the economics of execution aren’t in your favor.
Assuming Prediction Markets Are Passive Investments
One of the most common misconceptions is treating prediction markets like passive long-term investments. They’re not. Each contract has an expiration date tied to an event, and once that event concludes, the market closes.
Unlike holding Bitcoin or Ethereum, where you can “HODL” indefinitely, prediction markets demand active engagement. They are short-term, event-driven, and zero-sum.
The same Works in Progress analysis noted that these markets cannot behave like conventional financial instruments because of their negative-sum structure — “someone’s gain is necessarily someone else’s loss.”
This means timing and discipline matter. You can’t just buy a position and walk away. Monitoring news flow, probability shifts, and sentiment changes is part of the process. Active management — knowing when to cut losses or lock profits — is key to survival.
Learn Before You Leap
Prediction markets merge the analytical rigor of finance with the collective intelligence of crowds. They’re powerful tools for aggregating beliefs and revealing truths — but they demand knowledge, discipline, and caution.
Disclaimer
In line with the Trust Project guidelines, please note that the information provided on this page is not intended to be and should not be interpreted as legal, tax, investment, financial, or any other form of advice. It is important to only invest what you can afford to lose and to seek independent financial advice if you have any doubts. For further information, we suggest referring to the terms and conditions as well as the help and support pages provided by the issuer or advertiser. MetaversePost is committed to accurate, unbiased reporting, but market conditions are subject to change without notice.
About The Author
Alisa, a dedicated journalist at the MPost, specializes in cryptocurrency, zero-knowledge proofs, investments, and the expansive realm of Web3. With a keen eye for emerging trends and technologies, she delivers comprehensive coverage to inform and engage readers in the ever-evolving landscape of digital finance.
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Alisa, a dedicated journalist at the MPost, specializes in cryptocurrency, zero-knowledge proofs, investments, and the expansive realm of Web3. With a keen eye for emerging trends and technologies, she delivers comprehensive coverage to inform and engage readers in the ever-evolving landscape of digital finance.
