Prediction markets are having a moment. Kalshi—the largest licensed operator in the space—was valued at $22 billion earlier this year. Polymarket, Kalshi’s largest competitor, which operates in a legal gray area in the United States, is probably worth about $15 billion. The wealth-management firm Bernstein projects that the total volume of contracts traded on the markets will hit $1 trillion by 2030.
That’s the kind of result that ought to have both wonks and capitalists cheering. Prediction markets have come a long way from the early days, when they were the fixation of election nerds and the object of undue regulatory scrutiny.
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But their newfound success has come with some growing pains—fears about insider trading and an unfolding battle with state governments that will probably end up at the Supreme Court. The promise of prediction markets is that they’re more than just gambling. The question now is whether they can escape gambling’s lure.
Prediction markets are built on the Hayekian insight that prices are an efficient way to compress lots of information into one number. The price of a pencil, say, tells us how much producing a pencil costs and how many pencils people want. Prediction markets apply this idea to unknown future events, such as election outcomes, enabling people to make bets in order to price the probability of an event happening.
On the markets, users buy “event contracts” from one another for between $0 and $1 per share. The going price of a share at any given time is also the probability that the event will happen. At the time of this writing, for example, Kalshi users will pay 66 cents for “yes” contracts on President Trump being impeached during his term, implying that they give it two-in-three odds of an impeachment happening. If you disagree, and think the price is too high or too low, you can buy your own shares—and if you’re right, and the price jumps or falls, you make money.
For those of us who appreciate the beauty of markets, the idea is very attractive. Indeed, economists have long advocated for using prediction markets in public policy, and firms like Google actually use them for internal decision-making. Are the major markets’ valuations a reflection of everyone else catching up?
Unfortunately, not quite. Most prediction markets’ volume—as much as 90 percent—is actually bet on sports. And that’s where the trouble comes in.
After the Supreme Court struck down a federal ban in 2018, some 40 states legalized sports betting. The new sports books—DraftKings and FanDuel preeminent among them—are regulated by the states, which have traditionally overseen public health and morals. Not that that regulation is going well. Research has linked legalization to increases in bankruptcy, child maltreatment, and game-day violence, among other nasty outcomes.
Prediction markets, though, aren’t state-regulated sports books. The licensed ones (like Kalshi) are “designated contract markets” selling event contracts, overseen by the federal Commodity Futures Trading Commission. CFTC Chairman Mike Selig has made clear that he sees prediction markets and sports gambling as “two separate things.” As a result, prediction markets are operating with impunity in states where sports betting is banned, as well as not always following the rules imposed by states where sports betting is legal (selling to those over 18 but under 21, for example).
The situation has yielded an unpleasant legal feud. States have sued the markets; some are even passing laws to criminalize operating a prediction market. The prediction markets are suing back, as is the CFTC, alleging that the states are undermining its federal authority.
The dispute turns on scintillating legal questions such as whether sports betting counts as “gaming” under the Commodity Exchange Act, which the CFTC enforces. A rapidly emerging split in the federal circuits means that all this will likely wind up at the nation’s highest court. What will happen there is anyone’s guess. All we really know is that Neil Gorsuch tends to vote for whatever makes American Indians, who run their own casinos, happiest. (Maybe someone should make a prediction market about the outcome.)
None of these troubles means that prediction markets aren’t an excellent innovation—they are. State bans on them are misguided. What’s necessary is clarity as to which regulator’s rules obtain where, with an eye toward enforcing the law as written while avoiding the problems that come when firms can arbitrage between competing regulatory authorities. Most of all, we need much stronger guardrails around sports betting.
If there’s a moral to this story, maybe it’s this: wherever it emerges, vice tends to turn beautiful things ugly. An increasing share of our economy is consumed by such products, whether it’s the $40 billion marijuana industry, the several million Americans producing sexual content on OnlyFans, or the half of men under 50 with a sports-betting account. Absent cultural and legal response, such products will spread into every corner of our society. And we will all be the poorer for it.
