Kalshi, other prediction markets proliferate ahead of US election

As the United States approaches the pivotal elections on November 5, investors and bettors are increasingly turning their attention to political prediction markets, such as Kalshi. This trend reflects a significant shift in how political events are perceived and wagered upon, particularly in the context of the upcoming presidential race.

Prediction markets—platforms where participants can buy and sell contracts that pay out based on the outcome of events—have existed in a legal gray area. However, a recent ruling from the US Court of Appeals for the District of Columbia has provided new clarity, energizing both investors and casual bettors attracted by these emerging markets.

On October 2, 2023, the court sided with Kalshi, a New York-based exchange. This decision reversed a prior ruling by the Commodity Futures Trading Commission (CFTC), which had moved to delist Kalshi’s Senate and House-related contracts in June 2023, arguing that they resembled gaming due to their speculative nature.

Kalshi’s legal team positioned their offerings as a necessary tool for hedging political risk, akin to financial trading in regulated markets. They emphasized that regulated platforms can provide safety and transparency compared to unregulated alternatives, particularly in today’s climate of election-related misinformation.

Kalshi’s Rapid Growth

The impact of this ruling is immediately evident in Kalshi’s performance. Just prior to the ruling, their total political contract volume stood at approximately $15 million (£11.5 million/€13.8 million) on October 15, but by November 3, it had soared to over $250 million. The presidential election market alone accounted for an impressive $184 million in contracts, overshadowing other political markets like electoral college predictions and state outcomes.

Interestingly, contracts regarding party control in Congress, which initially sparked CFTC scrutiny, are yielding considerably less trading volume, generating under $1 million as of the latest reports.

Competing Platforms: The Landscape of Prediction Markets

While Kalshi’s numbers are striking, they are dwarfed by competing platforms such as Polymarket. This crypto-based platform has amassed over $3 billion in political contracts for the current election cycle and, although not technically available to US users due to CFTC concerns, has established itself as a leader in the prediction market space.

Similarly, PredictIt, a platform operated by Victoria University of Wellington in New Zealand, has also attracted significant attention. While it describes itself as an educational tool for research purposes, the CFTC challenged its operational framework earlier this year, leading to uncertain legal ground for its users. Although PredictIt doesn’t disclose total contract amounts, it lists millions of active shares, indicating robust participation.

The Shift from Investing to Betting

Kalshi is now embracing a paradigm shift in its messaging, transitioning from framing its services as a form of investing to openly acknowledging their betting component. Previously, the legal rhetoric focused on “trading” and “investing,” but the platform’s marketing now emphasizes its status as a legitimate avenue for betting on election outcomes.

CEO Tarek Mansour’s public statements highlight this transition, emphasizing that Kalshi represents “the first platform that legalized betting on the US election.” They have actively leveraged social media and high-profile endorsements to promote engagement, steering the conversation toward betting activities—complete with promotional offers typically associated with traditional online gambling. Kalshi’s app is now ranked among the top financial apps on platforms like Apple’s App Store, showcasing its popularity and user-friendly interface.

Robinhood’s Involvement in Political Contracts

The announcement from Robinhood on October 28 to offer election event contracts signifies a new era in prediction markets. With 24.2 million users, Robinhood’s entry into this landscape could disrupt existing platforms and redraw market dynamics. The scale and influence of Robinhood raise important considerations for traditional gaming stakeholders as the regulatory environment evolves.

Projection Accuracy: A Path to Legitimacy

The credibility of prediction markets like Kalshi will likely hinge on their accuracy. Kalshi has positioned its odds as a more reliable alternative to traditional polling, which has recently shown discrepancies, particularly in the presidential race. For instance, while Kalshi shows Donald Trump with a 52%-48% lead over Kamala Harris, FiveThirtyEight’s aggregate polling has Harris ahead by a narrow margin. Should prediction markets consistently align with actual outcomes, their legitimacy and acceptance could significantly increase.

Industry Reactions: A Cautious Approach

Despite the rapid developments, the regulated gambling industry has responded with caution. Many former regulators have opted to remain silent due to clashing viewpoints on the legality and implications of prediction markets. The American Gaming Association has also refrained from commenting, possibly indicating uncertainty about the emerging frameworks of political predictions.

Industry experts suggest that the success of platforms like Kalshi could pose regulatory challenges, particularly given the inconsistencies between federal and state laws regarding wagering on elections. As the CFTC continues to pursue regulatory clarity for political contracts, the gambling landscape may face further complexities in the near future.

While the upcoming elections could serve as a litmus test for the viability of prediction markets, the outcome remains uncertain. The evolution of gambling legislation and market dynamics will undoubtedly influence how these platforms operate long-term. As we advance toward November, the intersection of politics, finance, and betting will continue to captivate investors and the public alike.