1049. Insights: Can you trade the future? The rise of prediction markets

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0:44Welcome to Fintech Insider Insights from 11FS. I'm Kate Moody and today we're cutting through the hype to talk about prediction markets. You've probably heard the term. They're huge in the US, but what exactly are they? How do they work? And why are so many people suddenly me paying attention. In this episode, we'll explore the rise of prediction markets from the standalone platforms building them to the financial apps starting to embed them and ask the big question, could they become the next major category in financial services? At first glance, it's easy just to dismiss this as another form of betting, another internet native trend dressed up with charts and probabilities.

1:18But here's the thing, scratch beneath the surface and prediction markets are raising some genuinely big questions about how we price information, about whether crowds can outperform experts, and about where the line really sits between investing and gambling. While this space still feels niche, part finance, part internet culture, there's a growing argument that these markets could become something much bigger. A new kind of asset class, a decision making tool, even a signal that institutions might one day take seriously. But there are challenges, big ones. Regulation is murky, the user experience is designed to be engaging, sometimes uncomfortably so.

1:52And there are real questions about who these products are actually for. Informed traders, curious consumers, or just people chasing a quick win. So let's get into it. I'm really excited. I've been joined to unpack what's real, what's hype, and what comes next in prediction markets by a really awesome panel. So let's meet them. First up, it's Emily Nicole, digital finance reporter at Bloomberg. How are you, Emily? Great to have you on the show as always. Would you mind giving our listeners a reintroduction to yourself, please. Yeah, I cover digital finance, crypto and prediction markets for Bloomberg.

2:23I've been on various 11FS pods quite a few times over the years when I used to write about fintech more than I do now. And I'm really happy to be able to talk about prediction markets today. Awesome. Well, welcome back and very excited to pick your brain. And next, we have an exciting fintech insider debut for Kate Nibbs, senior writer at Wired. Welcome to the show, Kate. I mean, always great to have another Kate on personally. But could you tell us a bit more about yourself off your work at Wired, please. Absolutely. So I'm a senior writer at Wired. I've been there for six years. I started on the culture desk and then jumped over to business, but I still sort of see everything as a culture story, including prediction markets.

3:01And I cover, you know, prediction markets, future of finance, and then AI and how it's shaping the media industry. And yeah, there has been so much news about prediction markets in the past few months. I don't even know how we're going to cover it all. So thanks for having me on to start digging in. Well, we're going to give it a good shot for sure. Okay, well, on that basis, let's jump in. So, I mean, I suppose first up, there's been a lot of chat about prediction markets, but we have quite a broad audience, right? Some people might be coming across this term or might have only heard it recently or coming across it for the first time.

3:36So, Emily, how would you explain what prediction markets are to somebody that maybe is just coming across this term for the first time or just doesn't really understand the space very deeply. So prediction markets are platforms that allow people to bet on the likelihood of a real-world event occurring. They're usually structured as yes or no bets, so you can buy the yes side or the no side, and each side has odds that are determined by what people are trading at that point in time. So that's meant to reflect the implied probability eventually. They're usually priced anywhere between 1 cent and 99 cents, with the idea being that if it resolves in the favor of yes or no, whichever one is the right outcome will go to a dollar and you get a full dollar payout at the end of it.

4:19I use the word dollar because these are really only markets that are available in the US or kind of in dollarized form at the moment. We don't really have them in the UK. What we do have, though, is we have a structure where companies like Betfair, for example, have a model that is Betfair Exchange, which is different to the main Betfair app. And this is a gambling product rather than a financial product, but it's still structured like prediction markets where you're trading with another person rather than trading against the house or the company like you would in a gambling situation or a casino.

4:49In theory, that's supposed to make them more fair because there's no house to win and, you know, the odds are set by the market rather than by the company. But, you know, there are a whole loads of other issues, which I'm sure we'll get into with prediction markets that can make them unfair. Yeah, brilliant. That's a great starting point. Kate, anything you'd add from your perspective in terms of like a starting definition for people to get their heads around? Yeah, so a lot of people who are participating in these markets tend to see them as gambling tools more than financial instruments. Because, so if you're going to place a bet in a traditional sports book and you want to put$500, say that Michigan State is going to win a March Madness game.

5:28You know, you give FanDuel or DraftKings or any sports book the$500, they set the odds, and then you see what happens. It's not that different when you are deciding to put money down on the outcome of a sporting event on a prediction market like Kelsey or Polymarket. You know, you could take$500 and put it on Michigan State winning. Under the hood is where the difference takes place because, as Emily was saying, you are actually purchasing an events contract, which is a type of future contract, binary yes or no. And so in that sense, you are not placing a bet. You are making this, you know, financial industry purchase.

6:15And so even though on the surface it looks the same to a lot of retail users, the platforms will emphasize that structurally they are very different. Yeah, no, absolutely. And my understanding, again, we were sort of talking before recording that everything changes like in this industry all the time. So maybe this won't be the case by the time we go live. But at the moment, prediction markets are currently regulated in the U.S. by the Commodity Futures Trading Commission or CFTC, which is the federal agency that oversees the derivatives market as well. So, how big an impact is that currently having?

6:51They are being regulated as a financial product, but as we've sort of already touched on, it kind of feels like they sit in this really gray space between financial products and gambling products. So, how important is the underlying regulation? So right now there is this massive fight going on in the United States over how to regulate these platforms. The federal government's position, which is the CFTC is, as you said, the federal agency regulating it, is that the CFTC is jurisdiction. These are financial instruments. They should be regulated as such. But then there are all of these states like Nevada and Massachusetts and Ohio and Arizona where the state regulators and state gaming commissions are fiercely fighting to change that approach.

7:39And they say that these are actually gambling platforms and they need to abide by state gambling regulations. And so there is, I believe, definitely over 40, I believe over 50 ongoing lawsuits on this subject where the states are suing the prediction markets. The prediction markets are preemptively suing the states. Arizona actually last week just filed criminal charges against Kalshi. They were misdemeanors, but arguing that it was illegally operating a gambling product. And so there is this giant back and forth. There's not consensus. It's a bipartisan mishmash issue. So you have conservatives on both sides, you have liberals on both sides.

8:22And we really don't know how it's going to play out. So at the moment, there's actually been this huge rush of different startups entering this space, getting licensed by the CFTC. It's like a really exciting moment for people who want to be in the prediction market industry, but it's also a really perilous one because it might all come crashing down. No, that's hugely helpful context. And Emily, I suppose from the perspective of traditional financial markets, how are they looking at the rise of prediction markets? Are they excited to have a new potential asset class or do they see this as a threat?

8:57Like kind of what's the current vibe there, would you say? In financial services, it seems like they're most excited about this. Like if we speak to firms on Wall Street, hedge funds, banks, even just like market structure companies like ICE, for example, which owns and operates the New York Stock Exchange. They've taken an investment in Polymarket. These are companies that are excited about what prediction markets can offer them because event contracts can be on anything from an Oscar winner to a sports game to what the weather will be in New York today. These are all options that they can use for hedging instruments.

9:29So if you're one of the examples that we like to use at Bloomberg is if you're an ice cream business and you need it to be hot weather in the summer because that's how your business does well, you can hedge against the risk of there being cold weather by buying shares on Calcio Poly market that there's going to be cold weather in your area at that point. So if cold weather comes, you make a profit, but your main ice cream business is suffering. These are the kinds of opportunities that main Wall Street firms see as a way that they could use in the market for various ways, whether it's they want to hedge their exposure to certain types of companies in the stock market, they want to hedge their exposure to certain kinds of commodities.

10:09that's what prediction markets offer them. On the flip side of that, we have the traditional sportsbooks that see this, as Kate was saying, like as a major threat. But a bunch of them have kind of tried to get into this themselves. So if we take FanDuel, for example, which owns quite a few of the, well, sorry, Flutter Entertainment, which owns FanDuel, which is one of the big sports betting apps, they've launched prediction markets in the US in every state where they didn't have sportsbooks before. So they're able to cover the whole country now by having prediction markets in some states and sportsbook in another.

10:38That's one of the ways in which they're all trying to get in on this race while also helping manage their own bets, I guess, in the state versus CFTC issue that's currently ongoing. yeah it's it's it is such a fascinating platform like when you go onto any of these platforms i just always find the first page mind-blowing like just the kind of like obviously they have the kind of different splits by different kind of sectors or or topics whatever but when you just kind of look like the trending page you've got literally kind of you know the price of bitcoin next to kind of the outcome of major geopolitical events versus like sporting events versus the weather it's just this kind of crazy mishmash of all the possible things.

11:18I can see why from a customer perspective I'm not even interested, I'm not a gambler but even I was kind of intrigued by it it feels like quite a compelling proposition do we see, Kate are you seeing this as sort of becoming like a more mainstream platform? Are we seeing everyday customers starting to use this or is it still kind of relatively niche mainly being used by particular cohorts of consumers? So it is relatively niche compared to like sports books. I was just talking to this firm that had run a poll on Gen Z users and only 12 percent of the respondents knew what a prediction market was.

12:01So like when you're talking to just anyone off the street, they're still nascent. They're not something that's totally mainstream, but they are absolutely booming and their growth is incredible, like hockey stick, exactly what you'd like to see. So it is something that's catching on with retail consumers. And then as Emily was talking, like there is so much excitement in the financial world about these platforms. And we are seeing institutional players entering the space at such a rate that honestly, if I was giving advice to someone who wanted to just play around with these as like a hobbyist, I would say, just so you know, you're like going up against traders at quant firms who think that you're kind of an idiot for participating.

12:44So just beware, be wary. These aren't, they might seem like spaces for retail players, but I don't know if that's going to stay that way. And I think like, Kate, you were kind of talking about your experience of when you go on the website and what you see. That is what most people in the UK, in Europe, places outside of the US, that is going to be their experience of prediction markets right now because these aren't platforms that are available to you very easily in those countries. Cal Street only accepts users that are registered in the US or they now have one arrangement in Brazil, but that's about it.

13:17Polymarket doesn't conduct identity checks, so you could technically be anywhere, but they do geoblock certain countries. So a lot of people choose to get around that by using VPNs to obscure their location. But technically, the UK, for example, is one of those locations where you shouldn't be allowed to trade on Polymarket. That does mean that while this phenomenon feels huge and we see it all the time, we hear people talk about it all the time, it's very much an America-centric idea at this point in time. We don't really have regulation or structural accessibility for prediction markets in other countries, at least not in kind of a regulated, safe manner that you'd expect from what we're hearing about in the U.S.

13:56Yeah, no, I think that's a really important call out. Yeah, okay. Oh, and like to that point, it is totally an American story. This actually just is such a crystallization of so many themes about the corrosion of American culture to me. But that said, one thing that a lot of people don't realize is that Kalshi is licensed in the U.S. Most of Polymarket is actually still offshore, even though it has this strong U.S. presence. It's headquartered in the U.S. There's only a small little like invite only version of Polymarket that's available in the U.S. Most of the trading volume is happening internationally and people are using virtual private networks to access it.

14:36And so and they also in that version, they use crypto wallets. So it's this like amorphous international entity that gets confused for something very similar to Kalshi. I think they're quite distinct, actually, in that way. Yeah. For crypto listeners, if you think about it, like if we think about the way that Binance and Binance US is structured or FTX and FTX US back in the day, like we had these like two separate venues. One is like the international hub that is huge, has all the volume. It's a total free-for-all. Maybe rules are a little bit more relaxed. And then the regulated US venue that has almost no volume at all.

15:14That's exactly what we see with Polymarket. Yeah. Yeah. And again, obviously, it feels like the rise of prediction markets and the continued rise of crypto are sort of connected, right? Like these are very interdependent spaces. Does that feel, is that a fair assessment, Kate? Yeah, I see this very much as an extension of the story that crypto started telling. And like crypto, NFTs, this is the financialization of everything and wild west of money. And you see a lot of the players in the prediction market space emerging from the crypto world. Yeah. And obviously, I think the prediction market's got a lot of attention in the aftermath of Donald Trump's re-election.

16:00Some people sort of saw them as being a much more accurate measure of that political outcome than more traditional polls. Are these really useful measures? Emily, are these actually going to help us to predict real world events, do you think? There have been some cases where they've been extremely accurate, right? So if we take the election, most of the markets on Polymarket, I don't know as much about Kautji, but especially on Polymarket, they called almost all of the races more accurately than the polls did months before the election happened. It was on Polymarket where Trump was forecast to win while the polls were saying it was going to be Kamala.

16:37So in that aspect, they're very accurate. And on economic data, we've been shown they're very accurate as well. So recently, there was some research done externally that the Federal Reserve then we published about how Kaoshi odds for economic data in the US was actually more frequently accurate than normal pollsters and forecasters that we used to rely on. So there is kind of wisdom to show that these things can be more accurate. But on the flip side, though, there are times when they're not that accurate. And this usually tends to be in markets where we have a lot less information or there's a lot less liquidity being put into them.

17:11Because the less volume that a market sees, the less crowd that you've got going into it, the less wisdom you're going to get. So if we take, for example, some of the more recent awards shows, they wouldn't get every single category, right? There would be at least kind of like a third that were wrong. These are examples where like maybe they're not markets that are economically significant, But it does undermine the overall argument that these things are more accurate than or have a really good ability to forecast than other methods that we used previously. Yeah, so I'd agree that they're, you know, interesting and helpful forecasting tools in a lot of circumstances, but fallible.

17:47But when Emily was specifically talking about the Oscars market, one thing that happened in the aftermath of the Oscars, I think, points to the fallibility, which is there was a tie at the Oscars, which is really, really unusual. And Kelshi and Polymarket resolved those markets in different ways and pissed people off in different ways in the way that they resolved them. Kelshi, you had to have selected Thai, which like very few people did because I think there have been seven Thais in the history of the Oscars. Polymarket had this fine print that said if a Thai occurred, they would resolve the market by alphabetical order.

18:28And so only one of the two films that won resulted in people profiting when they had selected it. And so in both scenarios, a lot of the people who had bought these events contracts were upset. and it sort of underlined that these are spaces where like you're buying a contract on what the outcome of an event would be and the underlying assumption is that there's going to be this like clear subjective truth and that doesn't always work out because how these individual companies define what happened is the be-all end-all so it was just a very interesting uh and telling case of how what the users think is the truth and what the platforms think is the truth can be different.

19:21Yeah, no, I think that's a really, really interesting example. I guess, I mean, I'm always, I'm quite an optimistic person, right? So I'm always kind of looking for like the positive spin on things. And one thing maybe some people do talk about when they talk about prediction markets is, is this a slightly more accessible way for people that maybe don't understand some more of the more complex investment products is this a more accessible way for people to kind of grow their money I mean Emily how do you see it do you think people are engaging with these types of platforms to to grow their money or do people just want to make a correct prediction like what what do you think is driving consumer engagement here I mean it comes back to the argument about whether this is investing or gambling and depending on who you ask you get a different answer right so so it depends on who you talk to I think though what What's interesting to note is that there has been some analysis done about how profitable these things can be, especially for traders who are at the lower end of income.

20:15So those who invest lower amounts on the platform, you know, kind of less than$10 ,000 in a portfolio, they tend to be wrong more often than not. I think some data that came out this week kind of showed that mostly they tend to have a median return on investment of about negative 8%. So they're more often losing money than they are winning it. But if you're somebody who invests a lot of your money on these platforms so that maybe you're trading on them more, you get used to how they operate, you know how these kinds of things are structured, you know where you can spot inefficiencies, they often tend to be profitable.

20:47So it depends on how you approach them, but it definitely is not a straightforward answer in any sense. and these are still very complicated financial instruments at the end of the day no matter how you dress up the financial wind like the window dressing what you're looking at um with it simplifying it to be yes no a set price all of this as Kate was saying like these are markets that have rules they're markets that have differences between each one of them linguistic nuances are something that catch people out all the time in these markets if you're not being careful enough to read them you're going to get caught out too and that's it's happening a lot at the moment.

21:19Yeah, no, absolutely. And we're now starting to see, obviously, we've had platforms like Kalshi that have been very, very successful kind of in their own right, but we're now starting to see prediction markets become embedded into other platforms. How do you think that's going to, how has that already changed the game, Kate, and what you kind of see as the main thing to watch out for as we move forwards? So they've been embedded in a bunch of different financial platforms, which just speaks to the appetite for institutional players to participate. And I think that that is going to basically tilt these markets in favor of these savvier participants even more than they already are tilted.

21:59I think it's kind of going to make them a little hostile to retail users who want to make money. If they're doing it just to speculate for entertainment, they'll be fine. But that's going to change the dynamic, I think. One big trend that we're seeing is media companies striking deals and partnerships with these institutions. And, you know, at the Golden Globes, there were prediction market odds shown. CNN and CNBC already have deals with prediction market companies to like embed their market information in their platform, sort of like tickers. And I suspect we're going to see a lot more enmeshment here.

22:41And in, I don't know, in one sense, it's like, I do think that there's use for them as forecasting tools. I don't think that they're something that we need to just pretend don't exist. But I do worry when it comes to, like, as Emily was saying, that they're like financial instruments that in, like, linguistics matter. We've already seen polymarket bettors freak out at a journalist for writing a story that ended up like crashing the markets that they had wanted to profit off of. And I think if we end up getting more institutional buy-in from media companies, because like Polymark and Cossie will also sometimes specifically say like, this market will resolve upon like five or six media companies producing stories that confirm one outcome or another.

23:30I'm just envisioning a world in which, you know, I'm writing a story about meta earnings and depending on how I word the story, it could change the outcome of the market. And then if Condé Nast was to enter into a partnership with one of these prediction markets, there could be, you know, an editorial directive put upon me to word it in a certain way. Just want to be clear, Condé Nast does not have a deal with these companies. That's not happening right now. But just like hypothetically, I can see this happening. And it's a little scary. Yeah, no, absolutely. And we've already kind of seen this, what you could argue is manipulation, like play out.

24:08So not necessarily from the media companies, but we had an incident last year where we were listening to the Coinbase earnings call. And the CEO of Coinbase, who's kind of coming to the end of the call, and he was like, oh, and I've just been told there's a prediction market about what I'm going to say on this call. So I'm just going to rattle off a few words here. and then he listed a bunch of them, Bitcoin, Web3, blockchain, all the ones he hadn't said yet. And on platforms like Polymarket and Calshi, traders were betting on whether or not those words were going to get said. And so once he started rattling them off, those things went to yes, and those people won a lot of money.

24:40Vice versa, people who had bought the no on those words lost money. But it goes to show how these kinds of markets do often expose themselves to manipulation. And that's something that, as regulators, the CFTC is going to have to grapple with at some point because one of the core rules of the CFTC principles is that markets are not readily susceptible to manipulation. Mentioned markets are one that is very clearly something that could be manipulated. In that sense, it was. I should preface that Coinbase didn't. Coinbase says that Brian didn't trade on it, so he didn't profit from him saying those words.

25:12But, you know, he obviously changed the outcome very, very visibly. Okay, we're going to take a quick break here, but don't go anywhere. As in part two, we're going to continue looking at all the nuances to prediction markets and explore what we think the future holds for them. So don't go anywhere. Hey folks, if you're anything like us, you're on the road constantly. Airports, hotels, conference centers, half the time the Wi-Fi feels as safe as shouting, my pin is 1234 across the departures lounge. That's where NordVPN comes in. One click or no clicks with AutoConnect. And suddenly every sketchy airport network becomes a whole lot safer.