With the rise of support for legal gambling across the United States, we have seen event-prediction based gambling become more and more popular.
This isn’t necessarily a new idea— we have seen informal gambling on U.S. elections from as far back as 1868. Prediction markets slowed in the 1930’s when stricter regulations around gambling began to be enacted but rose again in popularity in recent times with the growth of other forms of gambling (typically sports based).
Prediction markets often are extremely successful (see historic election result predictions as a good example) posing many to wonder what drives that success. It typically comes down to wisdom of the crowd, the notion that the judgement of a collection of people should theoretically always be more accurate than the views of the individual and a massive collection of internalized information leads to accurate results.
This doesn’t always work out, however. We clearly see flaws in wisdom of the crowd when many are influenced such as the 2008 housing crisis where a massive bubble sustained for years before finally bursting and threatening the global economy. We also see controversy in Prediction markets as well. In 2003, prediction markets were created and wagers placed on when Saddam Hussein would be ousted.
Regardless of personal opinion, it is clear that there are substantial utility in these markets for gamblers interested in increasing exposure and as a tool to provide real data points on collective opinion about a variety of outcomes in any walk of life. We often bet with friends and colleagues about how things will turn out (when I was a trader on wall-street we had a very similar game that we used to routinely play on the trading floor based on equity-index outcomes by the end of the day or economic results). This allows a formal process to get exposure to that type of risk, systematically.
One company has taken a role as a leader in this space — Kalshi.
Kalshi allows trading of “event contracts”, a new asset class corresponding to the results of a yes or no question. Each contract pays out $1 if the choice is correct and nothing if the choice is incorrect. The price of the contract fluctuates with the market and demand. Kalshi allows customers to bet on their convictions across a wide range of possible options. You could also theoretically hedge various outcomes using these contracts as well.
For markets to emerge on Kalshi they need to go through a short process. Initially, they need to be suggested internally or externally and then a review process occurs. Assuming that the proposal is accepted by Kalshi and meets federal regulation, it will become available on the platform.
With the rise of interest in gambling, Kalshi is in a unique position as a leader in the prediction market space. It is the first federally regulated (by the CFTC) exchange and can use this status as a means of legitimacy to grow the footprint of the business. I imagine the most straight-forward competition would be the largest US betting companies (such as Draftkings or Fanduel) adding similar features to their platform in more traditional betting forms as opposed to contract trading. I continue to believe Kalshi will see utility as a data source and betting tool, growing with the greater public interest in legal betting.