The Rise of Prediction Markets
Source: Priscilla du Preez
Americans love to gamble. Whether it’s cards, horses, slots, or sports, betting is a national pastime. Now, a new category of speculation has hit the mainstream: elections. While political wagers have existed since the country’s founding, and were even commonplace through the early 20th century, they were effectively made illegal in the post-WW2 era by a series of state laws and federal regulations. But in 2024, something happened. Suddenly, billions of dollars poured into bets on the outcome of the presidential race, adding up to $3 billion by Election Day. What changed?
The answer lies in the rise of prediction markets. Originally developed as a research tool in the 1980s and 1990s, these markets were meant to harness the collective intelligence of large groups. By allowing people to buy and sell binary contracts tied to future events (i.e, whether the price of oil will rise, whether a prototype will be successful) prediction markets translate diverse opinions and private information into a single, quantifiable forecast. Studies from institutions like the Iowa Electronic Markets and corporate forecasting experiments at Google have consistently shown that such markets can outperform traditional polls or expert panels.
Once a niche mechanism for aggregating opinion within business and research institutions, prediction markets catapulted into the American mainstream in September 2024. That month, Kalshi, a fully U.S.-regulated exchange operating with American dollars, won a landmark lawsuit against the Commodity Futures Trading Commission (CFTC). This ruling allowed Americans to legally bet on political outcomes for the first time in decades. At the same time, Polymarket, a global, decentralized, blockchain-based platform using cryptocurrency, has surged in popularity.
These platforms don’t just permit bets on elections. Kalshi (whose name means “everything” in Arabic) offers contracts spanning topics from the day’s highest temperature to who will be 2025’s most searched person on Google. Polymarket hosts similar questions, including the total number of tweets Elon Musk will post throughout the week (a market that has a trading volume of over $12 million). Notably, and controversially, Kalshi began to offer sports betting in the lead-up to last year’s Super Bowl. Polymarket quickly followed.
Kalshi’s move into sports betting, soon mirrored by Polymarket, signaled a push toward scale and mainstream adoption. Prediction markets that once promised insight now compete for the same users and dollars as sportsbooks and trading apps. To understand why, it’s worth examining how these platforms actually make money.
Business Model
Prediction markets earn profit by taking a cut of user activity. Kalshi charges service and transaction fees on every contract bought and sold, while Polymarket earns a spread on the difference between bid prices and ask prices. Essentially, for both platforms, the more people trade, the more money they make. That structure creates a strong incentive to encourage constant betting activity.
Unlike traditional betting sites that rely on sportsbooks setting odds, prediction markets are peer-to-peer. Prices are determined entirely by traders buying and selling “Yes” or “No” shares that settle at $1 if the event occurs and $0 if it doesn’t. If a contract on “Trump winning in 2024” trades at 60 cents, the market collectively assigns him a 60% chance of victory. Those prices fluctuate in real time as new information enters the public sphere. In theory, this dynamic makes prediction markets both more democratic and more efficient than expert forecasts.
Ultimately, volume is the key to profit. To attract more trades, platforms have to keep users engaged, often by presenting their markets less as research mechanisms and more like entertainment. The result is a hybrid product: part financial exchange, part gambling app, part social media feed. Polymarket’s homepage features serious political questions next to meme-based wagers (“Will Mr. Beast hit 460 million subscribers by December 31st?”), while Kalshi has introduced leaderboard systems and referral bonuses familiar to sports bettors. That formula has proven enormously successful, but it’s also brought Kalshi and Polymarket to the edge of legality. The more they resemble sportsbooks, the harder it becomes to defend them as neutral exchanges. This isn’t too much of an issue for Polymarket, which is based offshore and runs on cryptocurrency, but Kalshi, as a U.S.-based exchange, has drawn significant regulatory attention.
A Look at Ethics & Legality: Kalshi
In its 2024 lawsuit against the CFTC, Kalshi argued that its futures contracts are fundamentally different from gambling. As the company’s lawyers put it, “An event contract involves ‘gaming’ if it is contingent on a game or a game-related event… The classic example is a contract on the outcome of a sporting event.” In other words, political betting wasn’t gambling– sports betting was, and Kalshi didn’t do sports bets. Three months later, Kalshi launched its first Super Bowl contract.
Since then, the platform has only doubled down on the sports betting industry, offering contracts on almost every major professional sports league, and even targeting states where online sports betting is illegal. The ethical stakes of that expansion are clear, and most recently made obvious by the NBA betting scandal, which reignited public concern about how far wagering should extend into everyday life.
Despite its official status as a regulated exchange rather than a gambling site, Kalshi’s marketing tells a different story. Its ads use gambling language and explicitly target sports bettors. One Instagram ad read “Bet on the NFL, Legal in 50 states.” Another, aimed at Texan consumers, where sports gambling is still illegal, stated “BREAKING NEWS: SPORTS BETTING IN TEXAS IS NOW LEGAL” (it’s not). On paper, Kalshi’s sports contracts seem to cross a legal line. In practice, regulation is a lot more complicated.
As of November 11, Kalshi is governed solely by federal law and regulated by the Commodity Futures Trading Commission (CFTC). That’s exactly how the company would like it to remain. Under the Trump administration, the CFTC has taken a relatively friendly stance toward prediction markets (it’s worth noting that Kalshi brought on Donald Trump Jr. as an advisor earlier this year). Still, the platform faces ongoing lawsuits from several state gaming regulators, the outcomes of which could determine whether Kalshi can continue operating nationwide while effectively bypassing state gambling restrictions.
The Future for Prediction Markets
The modern form of the prediction market looks a lot different than its predecessors. Kalshi and Polymarket are not simple aggregators of information; they are social platforms that have commodified attention and speculation. This evolution reflects a broader trend in American finance and culture: the gamification of everything. Regulators now face a fundamental question: Do we want to live in a country that allows betting on everything? Policymakers will soon have to decide where to draw the boundary between markets that inform and markets that exploit.
For now, the political momentum favors Kalshi and the wider prediction market space. Nothing is certain yet, but we may soon be forced to confront whether boundless speculation can coexist with democracy without consuming it.