Is it gambling or an information source... The pros and cons of the rapidly growing prediction markets

Source: DigitalToday Original Title: Is it gambling or an information source? The rapidly expanding world of prediction markets Original Link: https://www.digitaltoday.co.kr/news/articleView.html?idxno=623402

The debate surrounding prediction markets(prediction markets) where people can place bets on various events continues to grow.

Once used mainly by political enthusiasts, prediction markets have rapidly emerged as platforms with significant influence across U.S. politics and culture. Popular prediction markets like Polymarket and Kalshi host betting on a wide range of topics, from sports games and election results to the wedding date of famous singer Taylor Swift.

Opportunities to access prediction market data are also increasing, even for ordinary people who do not participate directly. Major media outlets such as CNN, CNBC, and The Wall Street Journal(WSJ) have partnered with prediction market platforms to integrate their data into news coverage.

Prediction markets began to spread in the 2010s with the rise of political betting but remained far from mainstream. However, with the 2024 U.S. presidential election as a turning point, they quickly entered the mainstream. During this process, Polymarket also significantly increased its presence.

Founded in 2020, Polymarket provided betting odds on elections, showing that Trump was expected to have a larger lead than traditional polls indicated. Trump heavily promoted this on his social media platform, sharing graphics that showed a 64% chance of victory.

The amount of money wagered on prediction market platforms is growing. According to data from investment bank Piper Sandler, $12 billion was traded in December alone on Kalshi and Polymarket, representing an increase of over 400% compared to the previous year.

Amid this trend, the valuation of prediction market platforms has soared. Last year, Kalshi and Polymarket were valued at $11 billion and $9 billion, respectively, and attracted investments.

Prediction markets operate differently from traditional sports betting. They offer questions that can be answered with yes or no, such as “Will the Iranian regime collapse before 2027?” or “Will the Supreme Court issue a ruling supporting a specific policy?”

Users access these platforms, purchase contracts, and place bets of their desired amounts. These contracts fluctuate in price between $0 and $1.

This reflects how the market perceives the likelihood of a specific event occurring. A price of $0.20 indicates a 20% probability, while $0.90 indicates a 90% probability. When the event occurs and the outcome matches the contract, the contract’s value rises to $1, and profits are paid out. For example, if a user buys 100 contracts at $0.10 each, they earn $100 if the event occurs.

Unlike sports betting companies, prediction markets do not act as the “house” taking the opposite side of bets. Instead, they match buyers on both sides and generate revenue through transaction fees.

As the industry grows, concerns about the spread of gambling through prediction markets are also increasing. In the U.S., sports betting was largely illegal for decades until the Supreme Court declared it unconstitutional in 2018, leading to deregulation.

Prediction market platforms are also not immune to manipulation and insider trading allegations. Critics, including some members of Congress, worry that individuals with nonpublic information could profit from these markets.

In fact, hours before the U.S. military conducted an operation to arrest a foreign leader, an anonymous user on Polymarket bet tens of thousands of dollars on the leader’s resignation, fueling speculation that government officials used confidential military information to place bets. It is reported that this user made $410,000 from such trades.

Supporters of prediction markets argue that platforms like Polymarket and Kalshi are fundamentally different from gambling. They provide valuable new sources of information by allowing people to bet on events happening worldwide.

Kalshi co-founder said, “Prediction markets are the most effective way to aggregate information and the wisdom of crowds. When money is involved, people don’t lie. To avoid losing money, predictions must be accurate.” He added, “Kalshi has systems in place to prevent insider trading, and it operates regulated exchanges in the U.S.”

Despite growing concerns, prediction market companies are aggressively investing the capital they have raised into expanding their businesses. They are also active in marketing; Kalshi installed a large, colorful billboard in Times Square predicting election outcomes, and recent major award show broadcasts featured prediction market-related content.