Original title: Public Opinion as an Option: Leveraging Prediction Markets to Hedge Exposure to Spot Crypto Volatility
Prashanth Bhaskara, Aadit Jerfy · September 2026
Cryptocurrency prices move fast, making spot crypto risky to hold. The authors wanted a way for regular investors to manage this risk without selling off their coins. They tested a strategy using Bitcoin and prediction markets on Kalshi. In these markets, people trade contracts based on whether Bitcoin will reach a future price. The researchers treated these event contracts like financial options, which act like safety nets that pay out under certain market conditions. They tested this method across three market settings: rising, falling, and flat. They found that an actively adjusted mix of Bitcoin and Kalshi contracts beat simpler portfolios in all three settings. However, costs like fees can reduce these trading profits over time.
Imagine running a food cart that you refuse to shut down, even when storms might hit. A simple solution would be to stay home on cloudy days, but that means lost business every time the forecast wobbles. You want a way to buy protection for a bad day while keeping the cart open every day. In this paper, the Bitcoin holding is the food cart, and the insurance-like contracts are storm protection; the strategy shifts how much protection it holds depending on expected conditions, so the cart stays open in sunny, rainy, and in-between weather.
Retail crypto holders usually have to sell their coins or use complex derivatives to reduce risk. This framework uses Kalshi event contracts as insurance-like options, and the dynamic strategy beat simpler portfolios in rising, falling, and flat markets — so investors may not have to choose between keeping exposure and managing risk.
The abstract doesn't say much about limitations, but it does note that fees can erode future profits and that Bitcoin serves as a proof of concept. That leaves open how well the strategy generalizes to other cryptocurrencies, real-world trading costs, and regimes outside the bullish, bearish, and flat cases studied.
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Public Opinion as an Option: Leveraging Prediction Markets to Hedge Exposure to Spot Crypto Volatility — Prashanth Bhaskara, Aadit Jerfy
Abstract licence: CC0
Explanation generated by Synthesis from the abstract — it is not the original paper. This is a preprint, so it hasn't necessarily been peer reviewed.