How Prediction Markets Turned the World Into a Casino

Prediction markets are online platforms where individuals can bet on future events, ranging from who will be the year's richest person to the return of Jesus Christ. Platforms like Kalshi and Polymarket have seen an explosion in popularity over the past year, with partnerships with major media outlets like CNN and CNBC, and integration plans with Google. MLB has even named Polymarket its official prediction market partner, and the owner of the New York Stock Exchange has invested in Polymarket. These platforms are increasingly entering mainstream discourse. The amount of money involved in these markets has skyrocketed. Kalshi, for example, now handles $3 billion in notional trading weekly, a hundredfold increase from $30 million at the beginning of 2023. Similar growth is observed with Polymarket. This boom has led to the emergence of a new class of market watchers who place trades based on news and available information. Some individuals have reported significant financial gains, using their earnings to pay off student loans or cars. However, most participants tend to lose money, with a particular concern for young males aged 18 to 35. Prediction markets face criticism for the "financialization of everything," as people are betting on sensitive events such as wars. For instance, activity surged on platforms like Polymarket as the US and Israel prepared to strike Iran, raising ethical questions about whether betting on military endeavors should be permitted. As these markets become more esoteric and specific, they also become more susceptible to manipulation, making it difficult to monitor insider trading and market manipulation. From the perspective of prediction markets, this activity is not gambling but rather trading derivatives, regulated by the Commodity and Future Trading Commission (CFTC) at a federal level. Unlike traditional sports gambling, prediction markets do not have a "house" taking the opposite side of a bet. Instead, they match buyers and sellers and generate revenue through transaction fees. Prices for outcomes, which range from one cent to 99 cents, are determined by supply and demand, reflecting what traders are willing to pay for a particular outcome. While weather predictions are available, a significant portion of activity on these platforms revolves around sports. As of March, approximately 70% of Kalshi's weekly trading volume was sports-related. This trend comes after the Supreme Court struck down a federal ban on sports gambling in 2018, leading to its legalization in nearly 40 states and generating billions in tax revenue. However, states that have legalized sports betting are concerned they cannot control or collect tax revenues from sports betting occurring on platforms like Kalshi. Conversely, states that have not legalized sports betting are upset that it is now accessible without their consent or control. Several US states have sued Kalshi, Polymarket, and other platforms, arguing for jurisdiction over what they consider sports gambling. Arizona, for example, has filed criminal charges against Kalshi, accusing it of operating an illegal gambling business, a claim Kalshi intends to fight in court. Beyond sports, people also bet on politics. Polymarket and Kalshi gained prominence around the 2024 US presidential election, with their markets sometimes predicting outcomes more accurately than traditional polls. Donald Trump Jr. is an advisor to Kalshi and an advisor and investor in Polymarket. The Trump media company has also announced its own prediction market platform called Truth Predict. The Biden administration has been critical of Polymarket and Kalshi, while the same agency under the Trump administration has supported the industry's legality. Despite regulatory challenges, Polymarket has become federally registered and is offering some bets in the US, while Kalshi aims to expand overseas to 140 countries. Ethical questions, particularly concerning insider trading, persist. While traditional investing has clear rules against using non-public information, prediction markets can view insider information as a signal, potentially incentivizing individuals with such knowledge to disclose it to the market for financial gain. A notable example involved anonymous bets on Polymarket regarding the removal of Nicolas Maduro from office, which resulted in a $400,000 profit for someone with apparent prior knowledge. Polymarket has introduced rules to curb trading on non-public information, and Kalshi states it will penalize such behavior. However, the evolving rules do not entirely eliminate the ability to profit from insider information. Furthermore, the ethics of betting on conflict or violence remain contentious. Kalshi, adhering to CFTC core principles, prohibits bets on assassinations, terrorism, or war. However, Polymarket, due to its international nature, offers markets in areas considered unethical by some. The resolution of outcomes can also present challenges, even though platforms outline clear criteria and data sources. Despite these issues, Kalshi and Polymarket are attracting billions in funding. The boom is driven by individuals like Brandon Fean, a 25-year-old teacher who, despite an initial loss, has found success by approaching these markets with research, similar to a professional investor. Many participants conduct extensive research to gain an edge over "dumb money," with some employing incredibly sophisticated strategies. Supporters envision prediction markets becoming larger than the stock market, offering a platform for almost any prediction. However, for the majority, these platforms serve as a source of entertainment and a chance to win money. Analysis suggests that smaller investors tend to lose more often, while larger, professional investors tend to win bigger, a pattern reminiscent of Wall Street. The future of prediction markets is uncertain, with ongoing court cases potentially altering their business models if they are deemed equivalent to state-regulated sports betting.