Why Prediction Markets Are Turning Everything Into a Bet

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0:40Peter Kafka:From the Vox Media Podcast Network, this is Channels with Peter Kafka. That is me. I'm also chief correspondent at Business Insider. And today we are talking about the gambling industry, except it's not called the gambling industry. Instead, it's called the boom business for prediction markets, which have gone from super niche to super mainstream in the last couple of years. There are many signs that prediction markets are a big deal or potentially a big deal, including inescapable marketing campaigns and sky high valuations for companies like Calci and Polymarket. Another indicator, Kate Nibbs, the excellent reporter at Wired, has started covering prediction markets full time after proposing the idea to her editors.

1:25Peter Kafka:So this is one of those, Peter has a lot of questions for an expert episodes. And I do have a lot of questions about prediction markets, starting with why now? And are these things going to stick around? And who's going to regulate this stuff? And is this good for society? And wait, isn't this just sports betting dressed up as something else? Kate patiently walks me through all the stuff, and I'm glad she did. I think you will be too. So here's me talking to Wired's Kate Nibbs. I'm here with Kate Nibbs. She is the excellent technology reporter at Wired. Welcome, Kate. Thank you so much for having me.

2:01Peter Kafka:I was going to describe what your beat is, but it's a new beat. So you tell me, what is your beat and how did you decide this was a beat worth covering? I see it as related to some of my old beats. Prior to this, I was covering a lot of the AI copyright battles because I love anything that involves a regulatory gray area. Get me on Pacer and I'm happy. And so like a tech mess. Yes. I love a tech mess. And I was watching prediction markets explode in popularity while I was on maternity leave at the end of last year, thinking to myself, somebody needs to cover this. And then thinking to myself, I should cover it.

2:40So I came back to work with a memo for my editors, basically saying like, please put me on this. I really think it's a wild moment that is so wired in so many ways we got to get covering it.

2:51Peter Kafka:So summarize the memo, because there's lots of things that are weird in tech and some things come and go, right? Like you could have in 2021 said, I'm going to be all in on NFT coverage, right? And maybe that would have been great. And then, you know, nine months later, who cares? Why is this worth something that is you think is going to presumably you think prediction markets are going to stick around, are going to be meaningful in some way? Why is that? I think that they're part of this larger story about the casinofication of everything and risk becoming a bigger part of regular people's lives.

3:22This is a story about gambling in a lot of ways. I also think that it's a story about changes that are happening to the global financial system that are troubling. I don't know if prediction markets will be here in five years in the same way that they're here now, because it really depends on what happens with regulating these markets. But I think the behaviors that they're engendering in people like these these increased appetites for risk and gambling and taking wild financial chances and like gamifying our everyday lives and our consumption of news. I don't think that those things are going to go away.

4:03Peter Kafka:And so I see it as maybe if you started covering it, maybe this would have been a direct link from the NFT boom. Right. Yes. Totally. Crypto and pandemic. It's funny because I did dabble in NFT coverage and I wrote about this completely bonkers startup that allowed you to make an NFT of your tweets and then sell the NFT. And I did that. And then I was the first and last reporter to do that. They were like, you know, you're not allowed to sell your tweets as NFTs. I tried doing that and no one wanted to buy my ad. Unless I was doing the wrong one. Who knows? And now, you know, I think the market's over there.

4:38But so I saw there's now a startup that is allowing people to make prediction market wagers on how popular people's tweets are. And I really see them as spiritual siblings. I got to look into whether they have any of the same founders or not. But, yeah, it's all part of this. I think NFTs are truly part of this bigger story about the corrosion of American culture via gamifying and financializing everything.

5:05Peter Kafka:So I'd heard about prediction markets a few years ago. A guy I know who's got a day job in media was telling me he made more money betting on politics on, I can't remember his call she predicted. He was making more money because he thought he had a smart edge on politics. I don't know if he still does. When did this go from weird guy I know who's in the sort of fringes of tech and media to mainstream thing that you see advertised nonstop? nonstop. What spurred that move? I'm really curious if that guy was actually really good at betting or just really underpaid, but we could talk about that later.

5:41So there are a few different ways of looking at this. Like in one sense, this is pretty recent. It mainly came around when there were changes made that allowed Calci and Polymarket to really take off in the U.S. in another way the story of this started earlier when gambling like sports gambling became legal and people just got more accustomed to spending money on wagers on their phones so sports betting

6:11Peter Kafka:gets effectively legalized in 2018 and then rolls out on a state-by-state basis it's not legal everywhere in the u.s we could talk about that yeah um but that's so you're you're you're saying OK, people got more used to sports betting, doing betting on things from their phones. And that leads us to prediction markets. Yes. But then I do think that, you know, as you were saying, there's Predict It, which is a smaller election themed market. I actually played around on it probably five or six years ago. I made some money on John Fetterman winning. The concept of a prediction market is pretty old.

6:44Like they've been around for a while. There was an, you know, the University of Iowa ran an elections themed market. Predict it is from New Zealand, I believe. So in a sense, you know, they started out as this sort of academic niche thing and then grew and then just had this explosive moment. I also think there is a very compelling case to be made that these really are, as some of the people who work for these markets would have you believe, that these really are financial instruments. And that to talk about prediction markets, you can go back and talk about like the start of the commodities marketplaces in places like Chicago, where I'm from.

7:26You know, there are some really arcane laws about what you can and can't wager on or make trades on in prediction markets. One of them, you cannot buy contracts about onion futures. And that all stems from this guy, I think it was like in the 60s, basically seized control of the onion futures market in such a way that there is this huge outcry and it was categorized as gambling. And federal regulators just said, no more onions. You know, onion markets too corrupt. We can't do that.

8:04Peter Kafka:This is like the end of Trading Places with the orange futures. Yes. Yes. So I like I do think that there is like a reasonable position you could take is that this is prediction markets are truly an outgrowth of crazy futures trading. And again, the idea, the reason I mean, you're the expert, but my understanding is like the reason this stuff is regulated to any degree at all by commodity future. Yeah. CFTC Commodity Futures Trading Commission. is because these derivatives and being able to hedge risk if you're in agriculture, essentially, or other industries is a useful thing. And so if you're in the orange business, but you also think that maybe oranges are going to have a bad year, you can sort of hedge appropriately for that risk.

8:48Peter Kafka:And that's a real tool that people use. It is a real tool. And then so the modern prediction markets are arguing pretty forcefully right now that they can be used in the same way for a wide variety of things. You'll hear boosters of the industry talk about how, you know, energy firms are hedging on weather markets and like whether the Strait of Hormuz will open or close. So, yeah, that is a viewpoint. So before we get too esoteric, let's just talk about a bit about sort of the modern incarnation of these. I feel like these got national coverage in 2024 around the election. I think Elon Musk was telling Joe Rogan that he had a machine that could predict the future.

9:29Peter Kafka:And it turns out he was talking about prediction markets. And there was a lot of, you know, the prediction markets more accurate than the polls. And maybe there was some argument that it was. And then maybe not coincidentally, you have a Trump administration that gets elected after 24 that seems remarkably receptive to this stuff. And in fact, Donald Trump Jr. is connected to both Kalshi and polymarket. So how much of the boom is literally because we have a new administration and regulators and boosters who are in power who want this stuff to happen? I definitely think we would be having a very different conversation if we were looking at a different administration in power.

10:11Because, yeah, as you mentioned, Donald Trump Jr., he's an advisor to both of these companies, and I believe he's invested in polymarket as well. And then the Trump family, you know, have truth social, they're actually planning their own prediction market. Sure, why not? Yeah.

10:26Peter Kafka:Totally normal. And so they're friendly, obviously, in that way. The CFTC under the Trump administration has taken an extremely friendly approach thus far. They are adamant that they are the proper regulator of these markets. And the reason they've had to come out and say, this is our jurisdiction, everyone else back off is because there is currently this huge push from a variety of different like state regulators and authorities to try to get some of these prediction markets to abide by state gambling laws. And, you know, that would really curtail how they operate. And yeah, like the federal government right now is saying, no, we want them to grow and flourish and we don't want them to have to abide by state gambling laws.

11:11Peter Kafka:So there's a bunch of stuff going on here. There's a turf battle right between federal regulators, state regulators, politicians. It does not break down cleanly on Democrat Republican lines. So this could take forever. But can you broadly sort of explain who's pro prediction markets politically and who is trying to push them back? I mean, presumably, if you run a legal gambling company, you probably don't want competition from prediction markets. But I think those guys are also investing in it. So tell me how this how the battle lines. Yeah, they are. It's a very it looks like one of those boards where you got the crazy guy with all the different things.

11:49You know, I'm talking about the red string. Yeah. So it doesn't break down right versus left or Democrat versus Republican. The federal government thus far has been quite friendly, as we were saying. The CFTC. It's not like they're not regulating them at all, but they're taking a pretty laissez-faire approach. They don't want the states to have jurisdiction. Various states in particular.

12:11Peter Kafka:And they're out there doing interviews. The head of the CFTC is doing op-eds saying, don't come near this. This is my deal. Yeah. He literally said, see you in court, I think, to Senator Cox in Utah. So there's some states like Utah where gambling is straight up illegal. And they are coming at this from like a principled, we don't like wagering position. Morality, religion. Yeah, morality. But then there is also this huge push from states like Nevada where gambling is really intrinsic to the culture. And their issue with this is not about morals. It's about getting tax revenue and having these upstart companies follow the same rules that the casinos have been made to follow.

12:55So Kalshi is actually temporarily, most of its markets are temporarily banned in Nevada as of Friday because of these ongoing legal disputes. A court order went out banning it. But so, yeah, so there's federal versus states. And some of the players in the federal space are Republicans and some of the players in the states are Republicans and they're at each other's throats. There's a big push by lots of different members of Congress. It's pretty bipartisan to introduce legislation to put guardrails up in the industry. There is a piece of legislation just introduced today that would ban sports contracts, which are like by far the most popular.

13:39I think it's like the sixth or seventh piece of legislation on this issue introduced in the past few months. Um, there's, uh, you know, a bunch of new lobbying groups like Trump's ex chief of staff, Mick Mulvaney has introduced a anti prediction market lobbying group called gambling is not investing. Um, but then the, um, prediction market industry has its own lobbying group that actually has some democratic lawmakers on its side. So it's just this big messy battle right now.

14:12Peter Kafka:And so it could get dealt with by Congress. Congress doesn't really do much in the modern incarnation, although they did pass the ban TikTok bill a couple of years ago. And again, now no one can use TikTok, right? Yeah. It seems like it's going to end up at the Supreme Court at some point as well. I think so. I think maybe even as early as this year. And then part of the thing that makes this so interesting is that this is an Internet product, right? So lots of stuff is happening outside of the U.S. And in fact, I think you tell me, but my understanding is most people in the U.S. can't use Polymarket legally.

14:51Peter Kafka:You can explain to me how it works. But I know that Kelshi sent me an ad of the day of the Super Bowl and said, you should bet on the big game. And I downloaded the app and I connected it to my Apple Pay and it took all of a couple minutes. And actually, there was a problem actually funding it, but whatever. But his point is I was able to make a bet legally right away. I lost my money on the length of the Super Bowl pregame, I guess. But when I go to Polymarket, it either tells me I can't use it in the U.S. or I can't use it in New York. And I'm pretty sure that if I do use it, I need to use a VPN and or crypto.

15:24Peter Kafka:And it's confusing me because I see Polymarket and CalShare referred to as sort of equivalent. But it seems like there's a lot more friction to involve yourself in Polymarket. So, first of all, how does something happen off books outside of the U.S. in a way that lots of people in the U.S. can actually use? So most of the people in the U.S. who are using Polymarket are using it via VPN, a virtual private network. So as you're saying, these two companies get brought up in conversation a lot because they are by far the two leading companies in the space, but they are pretty different. CalSheet is currently federally legal in all 50 states.

16:01It went through this licensing process with the CFTC.

16:04Peter Kafka:Got licensed by the CFTC. Um, Polymarket was actually banned by Biden's CFTC because it didn't go through what it, that version of the CFTC deemed the appropriate processes. The CEO got raided, right? Right before or after the election? Mm-hmm. And he was very blasé about it and I think kind of flipping everybody off and thought it was a big hoot. So now they're allowed back in the U.S. in a very limited capacity. There's like a wait list you have to join and they're only offering a very small smattering of contracts, mostly on sports. So when you hear about people using Polymarket to, for example, bet on events in the war in Iran, that's the international version, which people in the U.S.

16:45are not legally allowed to use. And yeah, so people in the U.S. who are using it are getting on a VPN. And then because it's crypto based, they can go via a crypto wallet that's not I mean, it's traceable, but there's not this huge enforcement push to bust a random man in New Jersey for betting$500 on international polymarket. So, yeah, they're quite different.

17:12Peter Kafka:If you told me I had to make a bet on polymarket, I'm sure I could figure out how to do it. I'm sure I could figure out how to download and use a VPN and a crypto. But it wouldn't be easy. Do you have any sense of sort of like when we talk about Kalshi and Polymarket, if they really are sort of roughly equivalent or one is the dominant one and the other one gets a lot of attention? I think that Polymarket, because it was sort of the first big name, might be coasting a little bit on its name recognition in comparison to how popular it is. Because Kalshi is definitely for like just a regular person who wants to experiment with these.

17:48It just is way easier to use for people in the United States. But you got to remember, this is a global thing. And like people in Europe are super into Polymarket. They're placing all there was this French guy who made hundreds of thousands, if not millions of dollars on Donald Trump's election. So, like, it is popular. It just there is this barrier to entry in the U.S. right now.

18:11Peter Kafka:Can you help? I should have asked this at the beginning, but I'm not very good at podcasting. Can you size the market for me? I've been looking around. It's very hard to figure out how big prediction markets are in general and how that compares to, like, legal betting. Yeah. So there are a bunch of different ways to look at like the volume and how many trades are happening. And it's harder to get a sense of the users. I know that it is still a lot smaller than sports betting. When we're talking about legal sports betting, like the volume that something like Kalshi is doing is less significantly than the volume of something like FanDuel or DraftKings.

18:49kings.

18:51Peter Kafka:And I want to get to the sports betting stuff in a second. But while we're talking about regulation, there is this ongoing discussion about insider trading and how do you regulate it? And also, is there such a thing as insider trading on these prediction markets? Because I've heard people in the past say there is no such thing. You want people with inside information to bet because they know what's going on and that's democratizing information. I can kind of see that argument, but it also, it makes no sense. If you have the ability to profit directly from this, it seems like it's going to lead to all kinds of problems.

19:26Peter Kafka:But for starters, who is going to regulate this stuff? I just saw right before we started recording a story across the wire saying, oh, Polymarket now has insider trading rules. And I thought, that's interesting. Why did they just announce those? So what do the markets themselves say about insider trading? And what do people who have the ability to fine or jail these folks, say, about insider trading? So one thing to note is like when we talk about insider trading, we're usually talking about it in the context of like someone who's an insider at a company like Google or something, taking non-public material information they know about that company and using it to profit in like the stock market and in traditional financial systems.

20:12Peter Kafka:And there are real rules about that. It's still There are real rules. Like, you know, companies have very clear definitions about what non-public material information is and how you can use it. And the fuzzy thing about prediction markets is now that there are so many different forms of contracts. Sometimes it's kind of clear because, you know, there are markets that let you bet on, like, how Google's earnings, what Google's earnings look like. Like, you know, you could see very easily how someone would insider trade on that if it was a Google employee making that kind of bet on a prediction market.

20:50Peter Kafka:And do the prediction markets say that's not legal? I mean, Google would have a problem with that, obviously. Yeah, it's against their terms. And I think that that would fit the definition of an insider trading situation from the CFTC. But then you have all these situations like at the Super Bowl, you could bet on like which song Bad Bunny would perform first. And then people were saying, well, what about, you know, if if one of the people who were the grass in his halftime show. There were thousands of people involved in the production of that of that of that halftime show or directly involved or would have knowledge of that.

21:24Peter Kafka:Could they bet on that? Yeah. And like all of them have cousins that they probably told. Can the cousins bet on it? So in situations like that, it's a lot fuzzier. And then it really comes down to enforcement discretion here, though. Like who is actually going to be arresting the cousin of the bad bunny grass for this? So there's two different things, right? There's what are the markets themselves say about this? Do they it seems like they want some kind of insider trading not to be illegal, but they're OK with other stuff. So Kalshi has really come out swinging, trying to establish itself as like the good angel on your prediction market shoulder versus like the bad boy poly market.

22:01But they have this whole enforcement wing and they recently released some information about insider trading cases that they'd flagged to the CFTC. They were pretty small potatoes cases, honestly, but they're at least making one was like an editor at Mr.