How Arbitrage Works in Prediction Markets

What Is Arbitrage?

Arbitrage is the practice of simultaneously buying and selling the same asset on different markets to profit from price differences. In prediction markets, this means buying YES on one platform and NO on another (for the same event) when their combined cost is less than ¢100.

For example: if "Will X happen?" trades at ¢40 YES on Polymarket and ¢55 NO on Kalshi, you can buy both for a total of ¢95. No matter the outcome, one contract pays ¢100. Your guaranteed profit is ¢5 per share (minus fees).

Why Arbitrage Exists

Price differences between Polymarket and Kalshi persist for several reasons:

Different user bases: Polymarket skews crypto-native; Kalshi skews US-regulated. Different demographics means different collective views.

Different liquidity: A market with $5M in volume prices more efficiently than one with $50K. Thinner markets are more prone to mispricing.

Fee structures: Kalshi's fee on winning trades creates a natural spread. A small price gap might exist indefinitely because fees make it unprofitable to arbitrage.

Information asymmetry: News might hit one platform's community before the other, causing temporary divergence.

Calculating Profit After Fees

Raw price gaps are misleading without fee calculation. The critical formula:

Arbitrage Profit = ¢100 − (YES price + NO price) − Fees

Polymarket typically charges zero trading fees. Kalshi charges approximately 7% of profit on winning contracts (with per-contract caps).

For a practical example: YES on Polymarket at ¢42, NO on Kalshi at ¢50. Total cost: ¢92. Raw gap: ¢8. If the event happens, your Polymarket YES pays ¢100 (profit ¢58) and Kalshi NO pays ¢0. But you only paid ¢92 total, so net profit is ¢8 minus Kalshi's fee on zero profit (¢0 fee). If the event doesn't happen, Kalshi NO pays ¢100 (profit ¢50), Kalshi fee on ¢50 profit ≈ ¢3.50. Net profit: ¢4.50.

Always calculate both outcome scenarios — the worse scenario is your guaranteed minimum profit.

Risks and Limitations

Arbitrage in prediction markets isn't perfectly risk-free:

Execution risk: Prices move. By the time you execute on the second platform, the gap may have closed.

Resolution risk: Platforms may interpret outcomes differently. One platform might resolve YES while the other disputes the result.

Liquidity risk: The quoted price might only be available for small quantities. Trying to fill a large order could move the price against you.

Capital lockup: Your funds are locked until the event resolves, which could be days or months. The annualized return might be lower than it appears.

Practical Strategy

Focus on markets with: high liquidity on both platforms (reduces execution risk), clear resolution criteria (reduces resolution risk), near-term expiration (improves capital efficiency), and significant volume (prices are more reliable).

Avoid arbitraging markets with ambiguous resolution terms, very low volume, or events far in the future where capital lockup erodes returns.

Arbitrage on ProfitLabs

ProfitLabs scans every matched market pair across Polymarket and Kalshi in real time. The arbitrage scanner calculates exact profit after Kalshi fees for both outcome scenarios, showing you the guaranteed minimum return.

Opportunities are ranked by profit percentage and flagged with arbitrage signal badges in your feed. You can filter by minimum profit threshold and sort by expiration date to optimize capital allocation.