The winter storm poised to sweep through the U.S. this weekend will cause major disruption, but it might also make some people a few extra bucks.
Why it matters: Everyday Americans are increasingly betting on the weather through prediction markets — an activity long reserved as a tool for businesses and big professional traders.
The big picture: With a huge swath of America set to get pummeled by snow and ice, some people are studying weather models or simply putting a finger to the wind in hopes of pocketing some cash.
- On Kalshi, for example, there was over $170,000 wagered as of Friday afternoon on how many inches of snow New York will get this weekend. (27% of traders were betting on 15+ inches.)
- A similar market on Polymarket had nearly $80,000 in contracts. (31% say 14+ inches.)
- You can make the same bet on Washington, D.C., on Polymarket. (10% say 15+)
Zoom out: Betting on the weather might be a growing hobby for some individuals, but it serves a real purpose for businesses.
- Utility companies, for example, can use weather derivatives to hedge against a mild winter — which could have a big impact on annual revenue.
How it works: Investment banks facilitate those contracts, and institutional traders help absorb the risk on the other side of the hedge.
- While these contracts already traded privately "over the counter," the first listed weather futures came in 1999 on the Chicago Mercantile Exchange.
Notably, institutional trading in weather derivatives — a total market estimated at over $25 billion — has been picking up in recent years, led by CME Group's long-running market.
- "Climate-related risk becoming more pronounced has created a paradigm shift in the way people view and model their weather risk, and the demand for these instruments has consequently surged," writes Tim Boyce, a weather markets expert, in a post for the Global Association of Risk Professionals.
At brokerage firm Interactive Brokers — which offers prediction markets through its ForecastEx platform — "our most frequently traded contracts are temperature contracts," chairman Thomas Peterffy said Wednesday on an earnings call.
- ForecastEX recorded 286 million pairs — or matched trades — in the fourth quarter, up from 15 million in the third quarter.
- While those contracts are accessible to individual traders, IB has said pricing and liquidity on the exchange are supported by a small group of institutional participants actively quoting prices.
Between the lines: Institutional investors value these assets for their diversification.
- Boyce noted that "weather derivatives are typically not correlated to traditional asset classes like stocks or bonds," which can be enticing to investors looking for alternative sources of value.
Yes, but: Weather derivatives themselves have not been widely available to retail investors.
- Prediction markets, on the other hand, are open to individuals and can offer numerous options.
- "There's probably an argument that prediction markets will be able to provide more granular and specific markets, if they can get enough liquidity for them," gambling industry consultant Dustin Gouker tells Axios in an email.
What we're watching: Kalshi has been advertising the ability to trade contracts on the weather, according to Gouker.
- This "is something they market heavily through digital channels," Gouker says.
