Prediction markets’ warp-speed growth is their biggest risk
More wagers will draw even greater attention to a market already under regulatory scrutiny
From Super Bowl to ice dance? Prediction markets have boomed during the American football season. Operators such as Kalshi and Polymarket must hope the Winter Olympics will take up the gambling slack. It would be better, though, if the action cooled: more wagers will draw even more attention to a market attempting the legal equivalent of a triple axel.
The growth of prediction markets has been prodigious. Sums wagered have risen ninefold since the US football season began, encouraging a stampede of new entrants. These include the UK’s Plus500, which announced its intentions this week. And as the practice of making yes-or-no bets spreads from politics and economics to sports, it has grown much closer to the mainstream of both gambling and finance; Goldman Sachs boss David Solomon recently described it as “super interesting”.
The $4.3bn wagered in the last week of January suggests a $200bn-a-year market that may already have surpassed online sports betting in size. That makes the legal haze around the industry, which draws in sophisticated financiers as well as mom-and-pop punters, harder to bear.
Financial watchdogs have unsurprisingly moved to assert their control. This week, the Commodity Futures Trading Commission maintained these wagers are financial swaps. It promised rational and coherent rulemaking — just what financial players such as broker Robinhood and Chicago exchange giant CME, which have dipped their toes into prediction markets, want to hear.
Several state-level gaming regulators, including New York and Nevada, are meanwhile in court arguing that predictions are a form of gambling and fall under their purview, not that of a federal watchdog. CME boss Terry Duffy assured analysts this week that if predictions are indeed deemed to be gambling, he would back away from that market. It is likely others would follow suit.
One way or another, clarity will come. There are some signs that smaller investors, most likely retail, lose more on predictions than they do via other forms of betting — and more than bigger players do, according to a dataset analysed by a team at Citizens JMP Securities. That’s the sort of ratio that could gird politicians into action.
Prediction markets, meanwhile, have a packed schedule. The Olympics will be followed by the football World Cup, partly hosted by the US, and the US midterm elections in November, bang in the middle of football season. It is all grist to their mill. But will the rules of the game change in a way that spoils their profit plans? It would be brave, if not reckless, to bet against it.