From Speculation to Risk Management: Predictive Markets Filling the Gap in Commercial Insurance

Speculation provides liquidity, and the demand for hedging is becoming apparent.

Written by: @G_Gyeomm

Compiled by: AIdidiaoJP, Foresight News

I. A New Type of Insurance Directly Priced by the Market

The recently launched AI risk management tool, Blanket, is attempting to transform predictive markets into genuine insurance tools for businesses. The logic is straightforward: businesses input their operational information, and the system automatically diagnoses the main risk exposures, then recommends corresponding Kalshi event contracts to help businesses hedge these risks.

The mechanism of hedging itself is not complicated. The contract structure of predictive markets is extremely clear—if the event occurs, it pays $1; if it does not, it pays $0. The real-time price of the contract reflects the market's collective judgment on the probability of the event occurring.

It is precisely this simple structure that gives predictive markets the potential to become real hedging tools. Businesses can buy event contracts in advance that will affect their operations, such as unusual weather, fluctuations in energy prices, or changes in tariff policies. Once these risks materialize, the contract payouts can partially or completely offset operational losses.

For example, an ice cream shop might lose about $20,000 in revenue during a cool summer.

The hedging operation would be as follows: buy 20,000 temperature contracts at $0.30 each. If the average summer temperature falls below a preset threshold, each contract pays out $1. The total cost is $6,000.

There are only two possible outcomes:

• Cool summer: The temperature is below the threshold, revenue drops by $20,000, but the contracts pay out $20,000 in one go. The final net loss is locked in at $6,000—exactly the amount spent on buying the contracts.
• Hot summer: The temperature is above the threshold, revenue is unaffected, but the contracts expire worthless, and the $6,000 cost is completely lost.

Regardless of the outcome, the final loss is firmly locked at $6,000. This $6,000 essentially represents the insurance premium. And the rate is determined not by actuaries from insurance companies or any traditional underwriting institutions, but by the market itself—the prices reported in real-time by countless buyers and sellers using real money.

II. Is the Hedging Market Really Functioning?

Predictive markets have accumulated enough speculative demand. They first gained recognition through election predictions and then successfully expanded into the sports sector, resolving issues related to trading volume. The industry generally believes that the next growth area lies in expanding more practical use cases, with hedging demand frequently mentioned as the most promising direction.

In theory, its value is indeed significant. The existing hedging tools cover a vast blank space. Traditional commercial insurance for business interruption usually requires physical damage as a prerequisite. A ski resort that loses revenue due to a lack of snow throughout the winter—this pure "operational risk" has almost no suitable insurance products available in the market to cover it.

The futures market does have mature hedging tools, but the barriers to entry are high: signing ISDA agreements, opening dedicated futures accounts, posting margins, and minimum contract size limits. These conditions are not an issue for large institutions, but they are nearly unattainable for ordinary small and medium-sized enterprises. Goldman Sachs can maintain a professional derivatives trading team, but a corner café clearly cannot.

The problem is that there remains a clear gap between theoretical rationality and practical use. Predictive markets have long carried the label of "gambling"; whether they can truly operate as an independent hedging market—and not just as a speculative tool—has never been systematically verified.

The real question that needs to be answered is: Are predictive markets actually being used for hedging? Is there a genuine demand for hedging? Trading behavior itself can provide clues. We selected three sets of data for comparison.

The first set is CME grain futures—a typical traditional hedging market, primarily used to mitigate losses from price fluctuations in agricultural and livestock products.

The second set is the Kalshi sports market—where hedging demand is extremely limited, and trading is almost entirely driven by speculation.

The third set is the Kalshi weather market—it handles weather risks similarly to CME weather futures while sharing the exact same event contract structure and trading environment as the Kalshi sports market. This makes it an excellent test sample—observing whether its trading behavior is closer to one side or the other.

Hedging and speculation typically exhibit different trading characteristics. Hedgers tend to establish positions before the risk window truly arrives and hold them until expiration; speculators, on the other hand, enter and exit more frequently, chasing prices, resulting in a significantly higher turnover rate.

If the turnover rate and holding behavior of the Kalshi weather market are closer to the traditional hedging market rather than the sports market, then the demand for hedging is genuinely present.

Conversely, if it is not much different from the sports market, then the actual use is more akin to pure speculation. In this case, tools like Blanket may only respond to the industry's optimistic vision rather than a demand confirmed by data.

The data set for this analysis covers 1,265 Kalshi markets settled between August 2025 and August 2026. The selection criteria were: a cumulative trading volume of at least 500 contracts and trading lasting at least three days.

III. Data 1: Average Daily Turnover Rate

First, let's look at how frequently positions in each market are traded. The turnover rate is defined as the daily trading volume divided by the open interest (OI) for that day. We calculated the daily turnover rate for each contract in every market and then took the median for the entire trading period.

The results are clear: the turnover rate for Kalshi weather contracts is the lowest at only 0.210. Traditional hedging product corn futures have a turnover rate of 0.266, while Kalshi sports contracts have the highest at 0.315.

The turnover speed of sports contracts is about 1.5 times that of weather contracts. This indicates that weather contracts have a relatively longer holding tendency, initially suggesting the possible existence of genuine hedging demand.

However, caution is warranted: corn futures have a turnover rate in the middle, and the differences among the three sets of data are not particularly significant. Relying solely on turnover rate does not fully confirm the existence of hedging demand in the weather market. Currently, this data can only clearly indicate that the turnover of weather contracts is significantly lower than that of sports contracts.

IV. Data 2: Hold to Expiration Ratio

The second key metric is the hold to expiration ratio—measuring how much open interest remains unchanged at settlement. The calculation method is the final open interest of each contract divided by the cumulative trading volume. A higher value indicates that more positions were firmly held until the expiration date.

The differences in results are very striking: regardless of how long the trading lasts, the hold to expiration ratio for weather contracts exceeds 0.5. In contrast, the sports contracts have ratios of only 0.012 and 0.033. In the trading range of 3 to 45 days, weather contracts are 42.8 times that of sports; in the range exceeding 45 days, the difference remains at 16.7 times.

This clearly indicates that weather contracts are much more inclined to be "held and not moved" compared to sports contracts. Hedgers hold contracts to ensure they can receive payouts once risks occur, rather than chasing price fluctuations for profit. Therefore, a high hold to expiration ratio strongly supports the judgment that there is genuine hedging demand in the weather market.

Of course, this cannot be directly interpreted as the entire weather market being used for hedging. This data does not track the identities of the buyers and sellers of individual positions, so it cannot be simply equated to the proportion of original buyers holding until expiration. What can currently be confirmed is that the holding behavior of weather contracts is distinctly different from that of sports contracts.

V. Data 3: When Positions Were Established

The final question is: when were these positions established? We divided the daily open interest of each contract by its peak open interest and converted the time from launch to expiration into a progress bar from 0% to 100%, then plotted the median curve.

The criterion is to observe the point at which half of the peak open interest is reached. If it reaches half while there is still a longer time until expiration, it indicates that the positions were established earlier—this aligns more with the behavior pattern of hedgers.

For weather contracts traded for 3 to 45 days, half of the peak open interest was reached at 47% of their lifecycle, with 53% of the time remaining until expiration. In the same range, sports contracts only reached half at 65%, leaving only 36% of the time.

In contracts exceeding 45 days, the differences are even more astonishing. Weather contracts reached half when there was still 32% of the time remaining until expiration, while sports contracts only had 1.3% left. In every range, weather positions were established much earlier than sports positions.

This "early layout" behavior is precisely a typical characteristic of traditional hedging markets. As of August 11, 2026, in CME grain and livestock futures, contracts with six months remaining until expiration have already accumulated substantial open interest. Corn futures even have 65,127 positions on contracts that expire 16 months later.

This reflects a tendency to act early before risks truly materialize. The behavior pattern of Kalshi weather contracts is clearly closer to that of traditional hedging markets rather than sports markets.

VI. Hedging Relies on Liquidity Built by Speculators

To conclude: the Kalshi weather market is neither a purely hedging market nor a purely speculative market like sports. Speculative demand still contributes a significant portion of liquidity, but on top of that, hedging demand has also relatively clearly emerged.

The three indicators point in the same direction: weather contract trading frequency is lower, more positions are retained at settlement, and positions are established earlier. No single indicator can confirm trading intent 100%, but the high consistency of these behaviors collectively supports one judgment—that there is indeed a holding demand in the Kalshi weather market that is different from sports, and a significant portion of it is likely genuine hedging demand.

More importantly, rather than being a weakness of predictive markets, speculative demand is a prerequisite for the establishment of hedging functions. A market with only hedgers and no speculators would struggle to find enough counterparties and maintain continuous liquidity.

In predictive markets, speculators are responsible for pricing and providing liquidity, while hedgers transfer the risks they do not wish to bear based on this foundation. Risks are no longer directly underwritten by insurance companies but are naturally dispersed among market participants through trading.

Therefore, the next phase of growth for predictive markets hinges not on "squeezing out" speculation and fully transitioning to hedging. What truly matters is how much genuine corporate hedging demand can be layered on top of the liquidity base already established by speculation. This is the core variable that determines whether it can upgrade from being an "interesting speculative tool" to a "usable risk management infrastructure."