Prediction markets are becoming more professionalized, but also harder to beat

Prediction-market platforms' courtship of Wall Street stands to bring in deeper professional liquidity and intensify competition, but will also mean it's harder for many traders to make money.

Roughly 27% of dollar profits were captured by just 3% of accounts that are "persistently skilled," repeatedly moving market prices towards outcomes that eventually occurred, according to an academic working paper analyzing $13.76 billion of Polymarket trades.

Skilled accounts earned consistent profits by reacting more quickly to publicly available news, arbitraging inconsistent pricing across related contracts and trading against behavioral errors. But as more institutions chase the same discrepancies, prices adjust faster and the available edge becomes scarcer.

"If you have a lot of skilled people, then they compete, and in doing so, they make prices more correct," said Theis Jensen, Yale economist and co-author of the paper.

That means strategies that depend on wide spreads and straightforward arbitrage across related contracts may find it more difficult to profit.

"It's harder as markets get more efficient and spreads get tighter. It's going to be harder to find these mispricing and arbitrage opportunities," Julie Hoover, Bank of America equity research analyst, told CNBC.

As competition intensifies, Jensen expects the proportion of traders considered to have an edge to shrink from 3% to potentially below 1%.

"I think it's only going to be the very, very best — say hedge funds — that are able to beat prediction markets," he said.