Break-Even Probability
In prediction markets, every trade has a cost and a potential payout. The break-even probability is the threshold where the expected payout equals that cost.
If the market’s implied probability is above the break-even level, the position has positive expected value. If it is below, the trade is expected to lose value over time. Break-even probability depends on price, fees, and payout structure. Even small fees can raise the break-even threshold and change whether a trade is attractive.
This concept helps separate probability from value. A forecast can be likely but still unprofitable if the price already reflects that likelihood.
For analysts, break-even probability is a key lens in prediction markets data. It explains trading decisions, entry timing, and why prices settle at certain levels.
Why It Matters
Break-even probability helps users understand when a trade makes sense. It prevents confusing likelihood with profitability in prediction markets.
How is break-even probability calculated in prediction markets?
Break-even probability is calculated by comparing the cost of entering a position with the payout if the outcome resolves as true. In binary markets, it is closely tied to the outcome price plus any fees. Higher costs raise the break-even level. Prediction markets data provides the inputs needed for this calculation.
Why can a high-probability outcome still have a poor break-even profile?
A high-probability outcome may be expensive to buy. If the price already reflects strong confidence, the break-even probability may be even higher than the market estimate. This makes the trade unattractive despite high likelihood. Break-even analysis reveals this mismatch.
How do traders use break-even probability in prediction markets?
Traders use break-even probability to decide when to enter or exit positions. They compare their own belief with the break-even threshold rather than with raw probability alone. If belief exceeds break-even, the trade may be worthwhile. This logic drives value-based trading behavior.
Real-World Example
On Polymarket, an outcome priced at 0.85 requires a very high belief to break even. A trader who believes the true probability is only slightly higher may avoid the trade despite the strong forecast.
Break-Even Probability and FinFeedAPI
FinFeedAPI’s Prediction Markets API provides prediction markets data needed to compute break-even probability. Analysts can combine outcome prices, fee structures, and payout rules to model break-even thresholds over time. This supports value analysis, trade evaluation, and incentive modeling. The API enables consistent break-even probability analysis across prediction markets.