Polymarket, Kalshi, and the Line Between Investing or Gambling

0:05Prediction markets are having a moment. From Fed odds to football, betting platforms are soaring. But how should investors use them? We're discussing today on Motley Fool Money.

0:19It's Tuesday, October 21st. Welcome to Motley Fool Money. I'm your host, Emily Flippen, and today I'm joined by Fool analysts Jason Hall and Sanmiteo as we dive into the growing world of prediction markets. We'll be talking about how investors can play the trend and if investing is really that different than just gambling itself. But first, let's discuss what even is a prediction market? Because I know I can't speak for our listeners, but speaking for myself, this was an industry that I didn't even know existed prior to 2025. I mean, some platforms like Kalshi and Polymarket, two of the most popular prediction platforms, just seemed to pop up overnight.

0:55Now, billions of dollars are flowing through these sites annually. What happened to cause this industry to explode? Well, prediction market is basically, in essence, or if you think of the movie Rat Race, where the rich guys are betting on anything and everything happening in the whole movie. That's kind of what prediction markets are. So the recipe for the explosion was really legal, well-funded, and user-friendly product that kind of lets anyone trade on real world events, like the New York City mayor election, top artists on Spotify, the existence of aliens. Kalshu is one of them, which became kind of the first CFTC regulated exchange.

1:33And that was a game changer because it made the entire space kind of feel legitimate and safe. You know, that legitimacy kind of opened the door for institutional investment, most notably, which we'll talk about a little later, is International Continental Exchange, which is the owner of the New York Stock Exchange, investing$2 billion into Polymarket, kind of giving those platforms, you know, money to fund their growth and product development. And then finally, you know, unlike, you know, clunky older platforms, Colushy and Polymarket, they're very easy and cheap to use. I mean, Jason, when I look at this industry, it just feels like gambling to me.

2:06So I can understand the argument that one may point at this and say, you know, to sound meets point. I mean, this is almost like a regulated financial market where these are operating almost as options contracts on specific real world events. But on the other hand, how is this different from gambling? Like what happened in the regulatory environment to allow these prediction markets to effectively crop up overnight? Look, this is gambling. All right. This is gambling. Legally, it exists. And this is where it's different than what we've seen from like DraftKings and FanDuel and MGM and Caesars have their betting sites.

2:41Those are regulated by the states. I think they're legal in about 30 states. Basically, what happened is Calshi bought a CFTC regulated exchange. And now they're saying, this is our business. So the difference is they're not the house. okay they're not the house where you're betting directly with the platform right you're betting the outcome with seizures right so you're you're making a bet with a counterparty on the other end and this is the platform that's that exists for you to be able to do that so they're taking a rake of that right the fees and things that they charge so that's that's how it exists because it's the same structure that's in place for commodities trading where it's different than commodities trading is if you participate in a commodities trade from the beginning to the end, you either have to pay to buy a commodity or somebody is going to give you money and you're going to sell them the commodity, right?

3:34The trade is for that thing. These are pure outcome trades, right? So they're able to exist because regulators have allowed it to happen so far. Now, there's still lawsuits going on, right? The federal government is saying, look, they exist because they're regulated by the CFTC as these exchanges. They're not true betting businesses. A lot of states are pushing back. There are lawsuits right now. These platforms have filed countersuits. So it's all still kind of playing out. So we're still trying to just get clarity on it. Well, for the time being, to the extent that regulators are allowing these platforms to exist, you can certainly bet on the fact that more and more individual investors and consumers are going to them.

4:14And yes, that pun was intended. Up next, we're digging into the publicly traded companies that are finding ways to create investor returns through these prediction markets. Stick with us. The Civil War and Reconstruction was a pivotal era in American history. When a war was fought to save the Union and to free the slaves. And when the work to rebuild the nation after that war was over turned into a struggle to guarantee liberty and justice for all Americans. I'm Tracy And I'm Rich. And we want to invite you to join us as we take an in-depth look at this pivotal era in American history. Look for the Civil War and Reconstruction wherever you find your podcasts.

4:58Welcome back to Motley Fool Money. Now that we have an idea about what prediction markets are and how they legally operate, let's dive into how investors can play this field. Like all of these vice industries, I recognize that prediction markets are probably a non-starter for many investors who want their portfolio to, to quote David Gardner, reflect their best vision of the future. But for investors whose best vision of the future includes more gambling opportunities, there always are plenty of publicly traded companies that are finding ways to monetize this new industry. Jason, I know we talked about Robinhood last week, but in March, Robinhood, whose ticker is H-O-O-D, launched its own prediction markets hub in partnership with CalShea.

5:37It's a section of its app specifically targeted towards these real world event contracts. So for investors looking to gain exposure to the prediction markets without participating in the markets themselves, how viable is buying shares of Robinhood today? So Robinhood's already told us that they're seeing, the business is seeing some momentum from this. And I think they have exposure to it that's going to probably grow. But I think the thesis for it, for Robinhood, and really any of the online brokers or even the betting platforms over time has to be more broad. These platforms are seeing explosive growth right now because the betting market was already huge.

6:15The friction has been removed right now. Prediction markets, if we want to use their nice little PR verbiage that they've put together that regulators have bot hook, line, and sinker, has existed as long as two people were able to have different opinions on the outcome of something and trade something of value for it, right? Betting has existed as long as humans have. So the friction has been removed to allow it to happen. But I think what's going to happen is over time, these platforms, they're not really going to have any serious competitive advantages at scale. They're going to operate as highly competitive price takers.

6:50We've already seen this happen with online brokers over the past half decade. Trading fees for stocks and ETFs have essentially disappeared. Options contracts are a lot less expensive than they used to be. If these platforms are going to survive with the prediction markets, you're going to see an explosion in competition. Right now, it's the test bet, right? The lawsuits and things are going to play out. There's going to be an explosion in competition if this survives the federal government regulating. or maybe there's a federal law that gets passed that say, hey, we're just going to take this under the purview of the federal government.

7:22That explosion of competition is going to happen. And then inevitably, we're going to see consolidation of the winners. Again, I'm going to bring online brokers back into that because that's largely what we've seen. These brokers do a lot more now than they used to as they've consolidated other parts of the financial services industry. So I mean, to an extent, we might actually already be seeing what Jason is talking about. And to play devil's advocate a little bit, I mean, some of these consolidators have been really decent investments. Robinhood, especially over the last couple of years, has been a stellar one.

7:51But part of the reason why this is such a hot topic right now is because, as you mentioned, Intercontinental Exchange, that ticker as ICE, the company that owns the New York Stock Exchange, recently announced a$2 billion investment in PolyMarket, one of those trading platforms. And that gives PolyMarket's platform a valuation of somewhere around$8 to$10 billion. So, huge private company that's doing a lot of volume here. And I understand to Jason's point, maybe you look at Robinhood and you're like, wow, that investment, that's just way too risky for me, but I'm still interested in playing this market.

8:24Is an alternative investment in intercontinental exchange, ICE, a viable alternative? Yeah. I mean, it's not just a viable return. For some, it might be the smarter one. It's a classic picks and shovels play of the gold rush. It's important not to overstate the investment though that ICE is making in in polymarket, you know,$2 billion sounds like a lot, but given what the trading revenue for, for ICE is, it's, it's just a small portion of that. Managers says it's not going to be very material over, you know, any short period of time here. So there's kind of touching into that market because they know it could be something, but instead of betting on a single high-risk platform, like, you know, Robin hood, you're investing in a company that owns kind of the entire financial railroad, you know, I see isn't speculating.

9:09They got the exchanges, the infrastructure and the profits from the activity itself. And they're taking a small piece of every transaction. Their investment in Polymark is just kind of like building a new track on that booming territory. So while investment in Robinhood is a bit on explosive growth, ICE is a bit on the inevitability of trading. You're swapping that electric upside for kind of that stable cash generating compound or that's positioned no matter which specific platform comes out on top. And mind you, people trade in up and down markets. So they tend to do well in either. Yeah, that's a fair point.

9:44And when I look at the platforms that have succeeded, which is really just so far the Calci and Poly markets, there's an understanding that these markets will tend to get bigger depending on network effects, right? Like the more people you have trading on the platform, the less friction there is in that exchange, the lower the fees are likely. So when you're looking at investment in this space, how important is it? and this goes to either you, Jason, or SendMeet, whoever has an opinion, how important is the platform they're associated with, right? Is it a matter of just a rising tide's going to lift all boats?

10:15So CalShe, Polymarket, doesn't really matter. Or is one platform better positioned for success over the other? So therefore you should be targeting an investment that is focused on that single platform. I would say the one with the more liquidity, the more volume, the more opportunities to do the trades where you feel more comfortable doing your trades and investments or bets would be the platform that could potentially be leading, but it will rise all tides too. This is going to be multiple platform winners. It's betting is already well over a hundred billion dollars globally. It's massive. I mean, there are some estimates that it might be a little off the mark that are calling this a trillion dollar industry, you know, within the next less than a decade.

10:52But I think again, that network effect you talked about, that is really important, right? That's hugely, hugely important. But I think if you're hearing nothing about them being into it, but Fidelity or Schwab, these big players, if this turns into something large, they have millions of customers, right? They have a built-in network effect. And I think you would see acquisition of some of these platforms over the long-term because while they have a lot of potential, we're going to see expansion. I think we could also see maybe the DraftKings and some of those sorts of companies, maybe look to participate more broadly by finding a regulated exchange that they can acquire, right?

11:27To become basically what Calci did to get into this business and the same thing that we just saw Polymark do, right? So I think the network effect is probably the most important thing because this is a very profitable, high margin business at scale. And there's going to be lots of capital flowing into it, but nothing I don't think is going to prove to be a true moat beyond stickiness with your customers and offering lots of different services to those customers to keep them. Thanks guys. Coming up next, we'll close out the show with a reflection on how investing, gambling and prediction markets are different or really possibly the same.

12:00Stick with us.

12:23Welcome back to Motley Fool Money. As we wrap up today's show, I want to expand out and look at the bigger picture around prediction markets. Of course, as part of the demand we're seeing, it's reflected in things like the rise of gambling, right? As more states have legalized just like sports betting, for example. We've seen broad exposure to gambling rise amongst Americans. But at the same time, studies have shown that younger Americans also distrust financial markets at a rate higher than their older generations. There's a belief that Wall Street is corrupt or weighted against them. So, Sandmi, it seems like prediction markets have almost offered this reprieve for people looking to get a return on their money and a system that they perceive is more fair, right?

13:01That depends on the perception of skill rather than luck. Do you think that's part of the reason why they've grown so rapidly? Yeah, that's exactly right. You know, the appeal is the clarity of the outcome. Prediction markets offer a pure test of judgment that you don't find elsewhere. Think about it. In poker, you play a perfect hand and still lose a lucky river card. In the stock market, you can be right about a company's future, but then the stock gets dragged down by market sentiment or Fed announcement. Prediction markets strip away all that noise. There's a direct, unambiguous link between your foresight and the result.

13:32The question is simply, were you right? Yes or no? And for a skilled risk taker, the clean outcome is the ultimate form of fare. This is a dopamine hit, people. Come on, let's be honest. That's what's happening right now is because, again, the friction has been removed. This is buying that lottery ticket. I think for the vast number of users, that's the case. And just as we saw the explosion of day trading in the early 2000s, when online trading became so ubiquitous. And then again, during the pandemic, when there was no sports betting around to bet on, it's there. And people will have the assumption of skill because it's easy to be able to do.

14:06And we're going to see a big transition of money from those who think they have skill and those who actually do have skill. I think it's going to remain big. But again, I don't think this is the next big thing or some uncorrelated asset that we need to have exposure to in our accounts. It's a big part of how financial action happens in the world. We do know that. But whether or not it needs to be something we have exposure to, I think is a very, very different question to answer. And it is interesting what's going to happen with the regulatory framework. After centuries, really, of this being kept in the dark and not legal in most places, is it now going to become more of a mainstream thing that can be part of the financial services business that we all own?

14:49Well, I can understand the argument that these effectively act as contracts as an investor. And maybe this is just me showing my age here, getting a little too old here for the podcast. But there's something nice to me that when I buy an equity, I'm buying aspects of a business that I have underlying economics, underlying cash generative potential. And so in In my mind, these types of contracts are almost more akin to options trading or commodities in the sense that their value depends, to your right, Jason, on the perception of value or the perception of skill, not actual cash generation itself.

15:20So while it has been an interesting industry to watch, it's also one that, to your earlier point, I think, well, in addition to some cash generating businesses like Robinhood or Intercontinental Exchange, it's also something that on an individual contract basis, investors can probably, in my opinion, avoid putting in their portfolios or betting their assets on and probably not miss out on too much in the world today. For now, Jason and Sunmeet, thank you both so much for joining. Listeners, be sure to join us for tomorrow's show where Travis will be diving into earnings season. As always, people on the program may have interest in the stocks they talk about and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear.

15:58All personal finance content follows The Motley Fool editorial standards and is not approved by advertisers. Advertisements are sponsored content and provided for informational purposes only. To see our full advertising disclosure, please check out our show notes. For Jason Hall, Samit Deo, and the entire Motley Fool Money team, I'm Emily Flippen. We'll see you tomorrow.