The Rise of Prediction Markets
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But the important thing here is that these prediction markets are not a crystal ball. They're not almighty, but they're as close as it gets. They're the best way to forecast the future because of this sort of skin in the game aspect. People don't lie when their money is involved.

I'm Ricky Mulvey, and that's Kalshi CEO and co-founder Tarek Mansour. On today's show, we're taking two looks at prediction markets, one from a leader in the industry and another from a journalist telling its story. In the first part, Mansour spoke with me about how prediction markets can differ from gambling and his platform is a source of truth.

So a basic question for you, but one that I think is important to your company and for our listeners understanding Kalshi. What is the difference between an event contract and a bet? Yeah, that's a great question. And, you know, obviously we get asked this a lot. And it's the central sort of one of the central questions around prediction markets. And, you know, the way I like to answer a question usually is in some ways sort of to outline that this question has been consistently asked whenever it came to sort of taking new financial markets mainstream.

And so very few people are not familiar with this, but when grain futures first came to the US, there was a question, there was actually a Supreme Court decision

about whether these are gambling or not. Are these bets or are they not? And the answer where the Supreme Court landed was like, sure, there's a lot of people that are speculating on these markets. So speculation is kind of a form of betting. It's similar in many ways. But these markets have economic utility beyond that speculative activity. And that's what makes them extremely important and makes them a financial instrument rather than a bet. A simpler way to even think about that is, you know, and I like to think about this

And that's a different frame, which is, you know, there are two types of risks, artificial risks and natural risks. An artificial risk is a risk that you create for the purpose of speculating on it. So it's like rolling a dice or doing a roulette spin, speculating on that or betting on that doesn't have really any utility outside of that activity, the betting activity itself. But something like, will Brexit happen or not?

that's a natural risk that's going to happen and impacts people in many ways beyond whether you know you have a bet or speculative activity on it or not and and so some like an event contract on brexit would be something that would qualify as a financial instrument and that's a that's a really different thing from like you know obviously speculating on a die roll

Let's get into the sports because your platform now offers. Yeah, March Madness still March Madness is still going on at the time of this recording, not when it's being released. What is the economic utility of an event contracts for the outcome of a sporting event?

Just to kind of take a step back. So we have cashiers markets on, you know, a very broad range of things. So politics, economics, weather, COVID and health science, and recently entered sports. Our entry to sports was sort of due to massive customer demand, both retail and institutional customers are in cashier today. Obviously there is an industry, you know, kind of the sports books and other that offer, you know, markets where you go and trade or bet against the house.

our market is different and you know the difference is like here like for any of our other event contracts prediction markets it's like a financial market it's like a stock market where people are buying and selling these shares where the event is happening or not the types of events we focused on so like for example you know who's going to win the super bowl or these title events these are like big events that have massive economic ramifications both economic and social ramifications to

the teams, the things around the teams, like the cities, the towns, localities around them, right? And you've seen, there's a bunch of reports that came out and the Eagles won

Like that has drastic economic impact on the city, on the teams and so on and so forth. And so you can imagine a lot, and you see there's massive amounts of money that are being invested on these leagues and these games and sports these days. It's a massive industry. That's not, you know, just a game. And so those people could basically be taking a position to increase their volatility or hedge their volatility against, you know, a bad outcome, which is, you know, their team losing. The other thing that's really important is that people care.

And one of the things, one of the functions of financial markets, a bit like going back to the grain futures argument, was this notion of price basing.

or basically figuring out what the pricing or the forecast of something is. At the time, you know, farmers needed to know what the price, the future price of grain was going to be. The beauty of our markets and prediction markets, they give you a price which is a forecast of whether an event is going to happen or not, which can enable people to make better decisions, figure out where they should invest and rely on a market-based forecast rather than pundits saying different things.

I am rooting for your platform to dramatically disrupt the sports betting market, and I think it will. I think it's an interesting case to be made, especially for economic utility. If, you know, let's say the Cincinnati Bengals win the Super Bowl next year, there's an economic impact on that city. And I think that argument is pretty strong.

If you look at something happening this weekend, there's a UFC featherweight title fight that's also on your platform. Alex Volkanovski versus Diego Lopez. There's Volkanovski's from Australia. So if he wins, there's an economic impact for Australia when you have the title coming back to that country. When you think about the future of your platform, though, let's go deeper and

Do you see that going across all sports? Because I think that's a strong argument for a title fight, but the first fight on the preliminary card, is that something that you expect to see in the future for Kalshi? Do you expect to see sort of the wide range of sports betting options that one can find on DraftKings and FanDuel? Are you planning on sticking to those high impact events?

The general answer to sort of what you're asking me is like, do I expect this to look like a kind of traditional sports book? The answer is no, it probably won't look like a traditional sports book because there are key differences, right? And so some are regulatory and they're very critical and others are even in the business model. And I'll start with the business model and you've seen, so our market benefits from concentration. You need these sort of big events that a lot of people care about or have, you know, have economic or social impact towards and

that concentrates volume and liquidity. Our business gets better and better with more volume, more liquidity. And the reason is because we don't take bets against the customers, right? Like that's not how we make money. And so for us, we need large sums of volumes to make money based on our small transaction fees that we take. And you might've seen some of the results, for example, in March Madness. And I was looking at some of the reporting, you know, our platform within two months of launch is actually one of the large players already in the industry in terms of volume traded through the platform.

because our markets really benefit from volume. And so this is as a rule of thumb, like then it makes more sense for us to concentrate as a business rather than go very, you know, kind of have all this long tail of different things that you can get exposure to or bet on traditional sports books. Again, because we don't make money off of someone losing a bet to us. That's just not how it works.

From a regulatory perspective, we need to focus on markets that have to satisfy, I mean, they have to satisfy, you know, a number of core principles are extremely heavily regulated. There's 23 core principles we have to abide by, but two that are very relevant here. So one is around, you know, the markets have to have economic relevance. And so if a market is kind of totally like doesn't have any sort of impact or people don't really care about it or there's no

whether it goes one way or the other, it doesn't matter in any way, shape or form to anybody, then it's kind of harder for us to do and doesn't really fit in our model. And number two is they have to be not readily susceptible to manipulation, which is another really key thing that we think about when you think about designing a marketplace that has market integrity and fairness. You have to put up things that are not easily manipulable, where, for example, like a player decides to do something, even if the economic gain is very limited, they could still do it because it's very easy to do it. And

And so those are the two things that we think about that make us pretty different, really fundamentally different from what you would see in a traditional sports book. So we'll stay on manipulability. Manipulability, is that the word? Anyway, the ability to manipulate a market, because I want to get to the visibility in your market in a second, which I think is incredibly important and groundbreaking, really, what you're doing for retail speculators.

But the ability to manipulate things, one of the things you can bet on is whether or not someone will say a word. So what Caroline Leavitt will say at a Trump press conference, whether or not the CEO of Netflix will say gaming in the next earnings call, whatever.

To me, that's the thing where I wonder if that can be manipulated. Let's say I'm an investment analyst who's going to be on the Netflix earnings call and I place a bet on gaming. I don't hear it in the comments up top, but I've got a bet on gaming. So that's going to inform what question I ask the CEO at the bottom. For manipulating in sports, that's one where let's say I'm going to go back. We'll use the UFC example.

there's consequences beyond the bet to manipulating a fight. If someone loses a fight, there are physical and career consequences for that. But if I'm an investment analyst and I'm just like, you know what, I'm going to ask this question about gaming, that seems almost like a harmless manipulation outside of the prediction market. So how are you thinking about manipulation, especially with what word will someone say in a press conference?

Totally. And I think that's a great question. And I will say it's kind of like a few things to think about here. One is, so the rules around CalSheet and the way that it's structured is very similar to a traditional financial market. So very simple analogy is the stock market, right? If people trade based on insider information or you're trying to manipulate a stock for the purpose of gain, that is actually illegal. And there's a whole kind of suite of systems in the New York Stock Exchange and NASDAQ and so on and so forth that have been built over the years

to flag this type of activity, figure out who did it, and then you can prosecute these people appropriately. And so it's the same exact thing on CalSheet. So we have developed over the years, and that was a big thing. You might know some of the history of the company. We spent three years getting regulated upfront so that we can be legal. And today we're the only legal broad prediction market in the US with the CFT to develop some of these systems to figure out how do we preserve market integrity and make sure that these types of activities are not happening. And so a few things. First, we KYC everybody. So we know who's trading on the product,

We know everything about them. Secondly, all the trades go through our systems, our surveillance systems that flag any unusual patterns or patterns of erratic or statistically weird behaviors. And then those go to our investigation team that runs investigations. And these are happening every hour, every day. We have a whole team that basically does these. And if we flag someone doing something like this, they can be prosecuted from a fine all the way to criminal prosecution. These are same as typical, what you would see in traditional financial markets.

And so my answer to this at a high level is like, this is pretty much on par with that investment analyst trying to manipulate a stock by asking a certain question or saying something on that earnings call. And so that person, if they did that, they wouldn't be allowed to take a trade. And if, you know, even if they tried to come up with some smart scheme, you know, if the money is sizable enough, if it matters, we're probably going to find it and they're going to be prosecuted. So that would be a crime.

Different markets have different susceptibility to manipulation, but earnings calls have quite stringent rules around them. Same with the Fed, by the way. People ask about the Fed a lot. What Powell will say in a speech

You know, that moves like that moves trillions of dollars in the economy. Right. Like if he says, you know, if he's slightly more hawkish than expected or more bear, you know, that's why they kind of script, you know, the power script is very well scripted beforehand. And there's rules around it, because if someone leaks it before to the bond market or other, you can, you know, can have drastic move before the speech. And I think it's very similar here.

One of the things I really appreciate about your market is the visibility into what's going on. So you can see trading volume for stocks if you go on Schwab, that kind of thing. But especially on the speculation side, for something like a March Madness game, DraftKings is not listing the betting volume for each game, whereas your platform, it does.

your platform also, you can see what people are betting on. You can see the live trade order flow, which is also something for stock markets. That's something that is not available to retail participants. Yes. What's your, you know, I'm throwing, I asked you some hard questions. I'll throw you some flowers. What's your philosophy on making these markets visible to the retail participants? Why is it important to you to make all of, basically all of your markets visible to everybody on your platform?

- Absolutely. And you know what, one comment on the hard questions, like, you know, please keep them coming. I mean, I love the hard questions in some ways.

any new type of financial innovation should and needs to be kind of met with some degree of healthy skepticism. And that healthy skepticism is the thing that pushes us to improve over time. There's sort of this nice feedback loop that improves these financial markets to get to the steady state they should get to. So I've always been a fan of these types of debates and hopefully you'll throw more at me. But so look, this is a great point. Transparency has been a very core piece of the mission and the vision for prediction markets. That's the whole point. We want a market-based mechanism to price the future.

we don't want the pricing to be a book. We don't want the pricing to be an analyst or a pundit or one single market maker or so on and so forth. We want it to be this sort of wisdom of the crowds aspect. We bring a variety of people with diverse opinions. Some of them may be from Wall Street, but actually on Kaoshi, a lot of them are not the top hedge fund manager.

And the toppers, it's retail individuals that love reading the news, know a lot about politics and feel like they don't have an edge in traditional financial markets because the large hedge funds have all the edge and all the asymmetric information. Whereas on CalSheet, information is equal.

And that's a very big part of this. Like we want everything to be out there. The price at any point in time, how the price comes to be, who's trading where. And you see if you open cash right now on the masters or on our economic or any of our markets, you see the live trades, as you mentioned, who is trading what, what is the size that's going on either side. And we don't want anyone to pay for that. That's open source. It's free. You can access it even if you're not a member of the product. And this is really, really kind of in vain with creating a level playing field.

where anyone can beat anyone else if they're looking to do research, to get smart about the future and be better. And I will give you one anecdote about this. And this is something that really makes us kind of really happy at the company, these types of anecdotes about our customers, which is I always tell people, so CalShi has been the most accurate forecast for politics. We saw it at the election, economic, inflation, and so on and so forth.

And I've been asking people like, "Hey, guess who has been the best inflation forecaster? Who has the best ROI return on investment on our inflation markets in the last two to three years?" People come in and guess, and we have some hedge funds on the product and market makers and like really kind of institutional players. And they usually guess some of those typical players. But actually the answer is it's a random dude from Kansas.

never traded financial markets before, doesn't trade options. This person is an avid news reader, reads the news every day, likes to be engaged with what's going on with the economy, what's going on with geopolitics, what's going on with a variety of different things.

And, you know, they ended up being pretty sharp at where the economy is heading. And those are types of people that are making real money. Now it's their full-time job on CalSheet. And if we weren't transparent, if there wasn't sort of extreme transparency to the platform where you're trading against other people and you can see everything out in the open, it'd be harder for these people to beat the books or the traditional hedge funds, which, you know, is kind of counter to what we're trying to build.

If this gentleman in Kansas is available for podcasts, our email is podcasts at fool.com. Hope he has an external microphone. We'd be very curious to talk to him about the macro economy. If he's truly the best on your platform.

There was a fundamental event for Kalshi, and that was the presidential election. That was where you got the most attention on your platform. And it was groundbreaking where you were the first legal market in the United States where people could bet on the election. Now that we're a few months past that, even though it feels like a lifetime ago, what did you learn about your market in speculative behavior from the 2024 presidential election?

a few things that led us to the election so the history of calci is we first spent three years up front getting regulated by the federal government to get a license from the commodity futures trading commission to operate the first derivatives exchange that can list prediction markets legally in the us then we operated for a while we wanted to list the election market but our regulator

believed that we should not list it and blocked us from listing it. We sued a regulator and took them to federal court over this election market. And we won that lawsuit a few weeks before the presidential election last year. Once we won that lawsuit, we legalized election markets and really a broad suite of prediction markets, event contracts in the United States. And for reference, election markets have been illegal since the Great Depression. And so we've opened up the ability to trade on the election based on our lawsuit.

Once we won that lawsuit, we have grown at an unprecedented rate. It was truly incredible. And I'll give some stats. So we did $2 billion of volume in the span of a month, month and a half. After we won, we were number one on the app store, overtaking ChatGPT, Instagram, TikTok, and a number of other apps. On election day, we were the largest out of all prediction markets by quite a bit. And we got around 500 million unique people visiting our site.

So that's a substantial chunk of people in the world. And so what we've seen is like, first of all, the entire planet really cares about U.S. elections. And this might be obvious, but I think we've kind of now we have real data to prove that. Number two, there was a period in time around the end of the day where our number of site visits overtook CNN and Fox.

And that was a sign where people did not know where to look. Because if you looked at CNN, they were saying one candidate is winning, Harris. And if you looked at Fox, they were saying that Trump is winning. And people kind of didn't know where to look. So they came to us, the prediction markets, where people have their money where their mouth is to figure out who's winning and what was going on. And so that was really incredible. And it was amazing because it worked.

I don't know if you saw the announcement. So we announced Dawn Jr. joining as an advisor in January and a big part of why ended up being rallied about the mission and he tweeted about this was how in Mar-a-Lago they were using the app and the site and they were looking at the odds

for figuring out who's gonna win, which was kind of this, we've come a long way, right? Like this was a niche internet thing to now being totally mainstream and people are kind of using it normally, but it worked, you know, and people were saying that these markets, you know, were biased or manipulated and so on. But actually you saw that the polls were all at 50/50 and CalSheet and other prediction markets were at 62, 63%. And so the prediction markets were right. And I think now there's this sort of moment where people realize like we should embrace this technology. It's working.

It's being used and we see now and I've talked about this like doge and Elon Musk uses our markets to inform how much they're going to be cutting in federal spend number of federal agencies and economic Fed and others are pulling our market data to figure out how to influence economic and government policy over time same with institutions and businesses But the important thing here is that these prediction markets are not a crystal ball. They're not they're not almighty and

But they're as close as it gets. They're the best way to forecast the future because of this sort of skin in the game aspect that people don't lie when their money is involved. I don't begrudge any financial institution for lobbying or trying to get close to politics. You mentioned Donald Trump Jr. is a strategic advisor. What strategy is he advising you on? What are those conversations like right now?

Yeah, I mean, I think people always mention things like, you know, lobbying and other, I mean, look, we are not, we're not a partisan company. Like, that's very important to understand. We have Democrats and Republicans involved with the company, both at the board level and obviously in the company itself. And so what we are is we're believers in the mission that we're focused on. Right?

Right. And so anyone that agrees with that mission, I think we would welcome them and we'd hope for them to come and help us. And that's true for both sides of the aisle. And, you know, I think it's specifically when it comes to Don Jr., it's Don and actually the Trump family for a decade now have been big fans of going direct.

Talking to people directly. So Twitter is obviously a big part of it, Truth Social and so on. And part of it is like, you know, generally the media has been sort of pretty adverse to Trump. And so the intermediaries didn't really work out for them. So they had to go direct and talk directly to the people. And X was a big vehicle for that. And I think of prediction markets are being very complementary to that, which is going direct, being directly involved with the people and this sort of wisdom of the crowds or decentralization of news.

Right? Like X, like you go on X to get news from people, not from an authority or an institution like a newspaper. And you go to prediction markets to get news about the future from people, from markets. And I think these two gel very, very well together. And, you know, Donna has been a pretty big fan of prediction markets. Obviously when they went mainstream at the end of the year, that's, you know, that's kind of heightened the interest.

advising us how all things go to market. We're expanding to new jurisdiction, the new types of markets that may be actually useful and may help us educate. This has gone very mainstream. Now we have millions of customers. How do we take it to the next 100 million customer? And I think he's going to be very helpful with that. He's been very helpful with that over the last few months.

You talked about going direct to market. I think your platform is incredibly useful for things like odds of a recession. People have to put their money where their mouth is. It's not just opinions from an economist. We talked about the election. There's stories that can be told within your platform. Right now, Kamala Harris and Stephen A. Smith have the same percent chance on your market of being the 2028 Democratic nominee.

I know you've talked about the TikTok ban before. When you look at the chart of that on your platform, up and down, the volatility in that, even the Jeff Epstein files getting released, you can see people's belief wavering, going up and down. Is there a story from your market that you find yourself thinking about a lot? There's so much interest around a variety of different things. And each market, and you might have seen this, there's a Calci Ideas section below the market.

which is this notion that it's a bit like X, but you can only post. It's a bit like Twitter, but you can only post if you have a position in the market. And it's beautiful because people are talking about, you know, sometimes they're making jokes and so on, but often they're talking about the analysis behind their positions. Why do I think TikTok is going to get banned?

Why do I think that Gavin Newsom has, you know, no chance of being a Democratic nominee? And, you know, I believe that Stephen A. Smith has actually a pretty big chance. And I think the odds right now are a buy. And I think the odds are mispriced. And the beauty of that is like, you can actually craft that story from this community that like is doing all this research and they're putting money where their mouth is. So look, I mean, I think right now the story on cash is that there's a lot of volatility and you see it in the odds, right? Like the odds of a recession are moving a lot.

And the beauty is these markets work. If you trust that these markets work and they are kind of accurate at every point in time, and if the odds are constantly moving, so they were at 70% two days ago, three days ago, now they're back at 50%, 55%, that just tells you that right now there's a lot of volatility and instability in financial markets, or really the system more broadly. And we see it across politics, geopolitics, economics, finance.

Financial markets, even things like science and technology. It's kind of like anything is fair game. And like, you know, in some ways, if anyone is on the news right now telling you, making these bold assumptions and predictions about exactly what's going to happen, they're probably being over certain and overconfident. They're probably wrong. And our markets are basically showing that volatility today. So we'll see how it happens. Recession market has been extremely heavily quoted in the last few days.

And I think it's because people don't know what's going to happen. I think they want to know, like, are we going into a recession or not? And right now the odds are, you might have checked them, Ricky, but I think they're like 55%. Above 60. Oh, 64%. They're back at 64%. Oh, wow.

They're back up. Oh, yeah. So, you know, two-thirds chance of a recession this year. The other thing going on, there are people that are not big fans of Kaoshi, and that includes casino lobbies. You've gotten cease and desist orders from Nevada, Maryland, Illinois, Montana, New Jersey, Ohio. I understand the arguments that you're not a gambling pool because you're not trading against a casino. You're trading against other players, so it's a little bit different. But just...

But broadly, what's it like going up against the casino lobbies? What's that experience like for you? Yeah, I mean, look, I don't think of it that way. I honestly don't think of it. I mean, there's a lot of headlines, a lot of news. And the thing I say sometimes, don't trust the news too much. The news loves to create these duels and fights and this kind of tension because news is tension. You want to see what's happening in the background and so on.

So, you know, actually a lot of like the operators, I mean, we're having a lot of very constructive dialogues with them. And so you see, we have cash.com, cash direct, where people go to cash directly and become members of the exchange and they trade with us. But the traditional go to market for exchanges like the New York Stock Exchange or CME is you don't go to CME or New York Stock Exchange to buy an option or a stock, right? You go to Schwab and Robinhood.

That's where you go. You go to your broker, your financial broker. And so right now we're launching brokers. So we've launched Robinhood and Webull. We have something like 10 to 12 brokers in the pipeline today. And that's going to be a big part of our go-to-market for a year. And that canon will include a lot of the sports operators that see kind of, they want to get into a financial markets offering or prediction market offering that will be powered by CalSheet. And so in many ways, what people are viewing as sort of this very conflictual

Competition is actually much more complimentary and looks a lot more like a partnership than people are sort of like thinking about.

Because people are thinking like, yeah, the prediction market offering is not actually that competitive. We know player props and all these different things that the books usually do. And definitely not iCasino, which is what casinos really do. Our offering really have nothing to do with that. But it's much more of a compliment. Could we provide odds to the participants in those products? And could there be just much more of a healthy emerge? And I think a lot of operators in the space see that. And that's why they're talking to us and working on partnerships with us and so on and so forth. So

So I think the premise is not quite right. I think, yes, so we do have some lawsuits right now with some of the states that believe that they have jurisdiction over this. And you might have seen the Nevada, the federal court in Las Vegas and Nevada kind of ruling against Nevada in this first step.

or ruling in favor of our preliminary injunction because our message has been very clear. Financial markets are regulated at the federal level. You can trade stocks anywhere in the US because it's regulated at the federal level. So if a state one day bans trading stocks, you can still trade stocks in a state because that's how the constitution and the law works. And it's a similar thing for anything that in exchange, what we call a DCM, which is what we are, does at the CFTC level.

I mean, I understand constructive dialogue, but they, you also, you got casino lobbies selling you cease and desist letters, which is usually not a let's keep talking kind of thing. But I understand you're offering something different from the sports books and the casinos. Look, my point wasn't about everyone, right? Like I think anything new that's sort of disrupting a potential like mechanism or industry and so on, like obviously will come with, as always, a healthy degree of skepticism. And so

I'm not saying that this is everybody in the industry. I think there's a lot of the industry that I think are looking to partner and work constructively. And we want to work with anyone, anyone that's willing to partner and work with us. And then some that sort of maybe like are more resistant and are still sort of figuring out what they want to do with this.

To be clear, we didn't receive any citizens from casinos or other we received from states, which is they're not the same parties. So that's important to flag here. Again, not everybody, but hopefully over time we'll rally more and more. I think the pie of people that are basically getting excited about this is growing in that industry. You also recently announced a partnership with Robinhood. I know it's early days, but how do you expect that to impact activity on your platform? And what do you expect Kalshi to do for Robinhood?

Yeah, I mean, so right now we have Robinhood and Webull launching the product. We have around 10 to 12 other brokerages that are in the process of integrating and hopefully launching sometime this year. Partnership has been extremely successful. And the way we see it is very similar, right? Like financial brokers like Robinhood, Schwab, Fidelity, Webull, and so on. What they do is they, you know, they list products that are exchange traded.

whether it's stocks or commodities or options, even crypto now more recently. And, you know, one of the markets are exchange traded today. Really the fastest growing one and the most exciting one is prediction markets as the markets are listed on CalSheet.

And as a regulated exchange, we're no different than New York Stock Exchange or CME. And we, over time, are going to put more and more of our markets, our prediction markets, next to stocks and options in the brokerages so that people can kind of really benefit from this sort of diversity of offerings. Like I can have my stocks position, like I can have my Tesla positions, for example, and I can hedge against Tesla earnings or against the Fed raising interest rates

or other types of things that may be going on in the world around me in one comprehensive portfolio. And we're extremely excited about that sort of direction for where this can be heading. So, you know, the partnership has been extremely successful. We expect and anticipate, you know, quite a few launches in the coming quarters in terms of brokerages. And I, you know, we're very excited about that part of the business.

Tarek Mansour is the CEO, co-founder of Akalshi. Thank you so much for your time and your insight. Appreciate you joining us on Motley Fool Money. Thanks for having me, Ricky. This was awesome.

There's another major player in prediction markets. It's called PolyMarket. This one runs on crypto and is currently not legal in the United States. Americans have to use a VPN if they want to play on the platform. After the break, New York Magazine features writer Jen Vietchner joins my colleague Mary Long to talk about how PolyMarket achieved escape velocity in a crowded field and the chance it'll become legal in the U.S. in the next few years.

This episode is brought to you by Amazon Business. How can you free up your team from time-consuming office tasks? Amazon Business empowers leaders to not only streamline purchasing, but better support their teams so they can focus on strategy and growth, free up your teams, and focus on your future. Learn more about the technology, insights, and support available at amazonbusiness.com. ♪

Jen Vietchner is a features writer for New York Magazine. Her latest story is a profile on Shane Copland, the founder of the prediction market, Polymarket. Jen, to kick us off, I'm going to quote a quote from Copland that you use in your story. He told you, quote, I mean, the plan is to build something that didn't yet exist and needed to exist that I cared more about than anyone else.

That's the end of the quote. This is interesting to me because tech titans like to sell us a lot of stuff that they say we need, but that maybe we don't actually need. Why does Copland believe Polymarket needs to exist?

So it's interesting. I think a lot of people see Polymarket as a betting site, but he doesn't. He sees it as sort of an alternative source of quote unquote truth, you know, a potential alternative to news, you know, in a way to kind of gain information that isn't readily available, you know, in kind of the mainstream news landscape that we have.

In other words, you know, this is a way of kind of sourcing information. You know, you could call it crowdsourcing. There have been other attempts to kind of, you know, harness the wisdom of the crowds, but nobody has really been able to get it to a mainstream scale where you can actually learn something about what the

like large part of the world is thinking this kind of critical mass of people. And so that is what he set out to achieve. You know, how could you tap into the wisdom of the crowds in a way that nobody had yet done, where you could actually glean some real insights and make predictions that were better than pundits or what you would see on TV or hear from the news.

And interestingly, and perhaps importantly, too, Polly Market called the election. And so post that win, Copland posted on X that Polly Market single-handedly called the election for anything else. The global truth machine is here, powered by the people. This wisdom of the crowds approach is interesting.

interesting to me. But when I read that, I think, okay, yes, polymarket got the election right. And I don't want to downplay that. And I think there's something compelling about the idea that, okay, when you're using prediction markets, you're not betting against the house. You're just putting money on whatever you think the outcome will be.

But I'm skeptical if that actually makes it a verifiable truth teller. Is there a running track record of the percentage of bets made on Polymarket, the final outcome that is predicted by the crowds, and then what percentage of those predictions actually turn out to be correct? If it's pitched by Shane as this is the truth, is there like a running tab of how often they are actually right?

I have not seen one, like a report card for prediction markets. That would be really useful. I do know that on the ones that really mattered, you know, would Biden drop out of the race? Huge. You know, would Sam Altman return as CEO of OpenAI after, you know, they tried to oust him? And who would win the election? They have, you know, a very good track record, you know, as do some of the other kind of leading prediction markets such as CalSheet. But PolyMarket has kind of made themselves into the gold standard for most things, notably Amazon.

Everybody got wrong, you know, that Beyonce was going to be at the DNC, including Polly Market, which I think is sort of a notable, kind of a funny one of one where they did not get right. But they were sort of, you know, still with even people, I think, who were kind of close to the situation thought

Beyonce was coming. So I give them a little bit of a pass there. But I wish there was something like you're describing. Who was actually on this platform? Because when I think about it, the image that comes to my mind is, okay, it's mostly regular people and they're making miscellaneous bets on everything from like, okay, who wins the presidential election? Will Beyonce be at the Super Bowl? To whether Blake Lively and Ryan Reynolds are going to get a divorce this year. Is there institutional money playing too? Or is that, hey, it's mostly normies, for lack of a better word. Is that pretty accurate?

No, I think probably a large part is, you know, these professional traders, Wall Street types, hedge fund managers. I mean, we even saw, you know, the so-called French whale who made a big bet on Donald Trump is an institutional investor. There's a lot of hedge funds that are actually using polymarket to potentially hedge their own bets as, you know, they've put a bet in the stock market that's based on, you know, some kind of prediction about something geopolitical or

macroeconomic and they want to hedge that by also putting money on polymarket, which I think is an interesting trend. So I would say, you know, as I talk to people, I hear a lot of people in finance and crypto who are really excited about this. Of course, there's people like me, you know, and others who just kind of want to bet on the Oscars. But I do think most of the money is coming from that professional institutional side. In your conversations with Shane,

Does the fact that so much of this money is seemingly coming from the institutional side, does that corrupt at all in his mind, this wisdom of the crowds, like this democratization of truth concept that he seems really excited about?

Yeah, so I should be clear. I don't know 100% that it's coming from the institutional. That's sort of my sense based on who I've been talking to. But I don't think in his mind that it corrupts it. I think, you know, he sees this as a platform for everyone, you know, the way that Amazon is a store for everyone. But he has talked about potentially the future business models and how, you know, Polymarket, which doesn't currently make any money, could...

eventually gather revenue by, you know, saying charging hedge funds a fee to list their own markets. And so I think they see this as, you know, kind of one avenue, but they wouldn't want it to, we wouldn't want to limit it to only, you know, professionals. Thanks for mentioning that Polymarket does not actually make any money at the moment. That was fascinating to me and reading your piece. For those less familiar, Polymarket was the most downloaded free news app on the Apple store this fall and processed more than $3 billion on the presidential election alone. And

And despite that, as you write, it's still in world eating expansionary mode. It does not collect fees. It does not actually make any money at the moment. Do you have a sense of when that might change? You mentioned, OK, maybe maybe they would turn to hedge funds and not charge the individual person that's going on in betting. But do you have a sense of kind of what the actual business plan might be moving forward?

That's a very good question. You know, Shane was kind of strangely unconcerned about it when I spoke with him. He's not in a rush to make money. I'll put it that way. He really wants to gain growth and mainstream audience and get as many millions of people using Polymarket to make it the most accurate source of predictions.

before they actually start charging. They could charge everybody a small transaction fee. I feel like he sees it as sort of an easy change to make when the time comes, you flip a switch, suddenly everybody's getting charged a small cut. You charge hedge funds a little bit more, maybe to list their own markets.

But basically he's saying when, when there is money flowing through as the more money that you have, that people are wagering on their own predictions, the easier it's going to be to, you know, for the business to actually make money just because there's so much sort of money in the ecosystem.

Joey Krug was the founder of a blockchain-based backed prediction market that's now since shut down, but he was an early investor in PolyMarket. And you write in your story that Krug was skeptical of Shane's pitches at first. In fact, he told Shane that, quote, prediction markets are one of the hardest types of startups to build. There are dozens of them and none of them hit escape velocity. Today, 90% of all prediction market activity happens on PolyMarket. It seems to me like it has hit escape velocity. What's the story of how exactly it got there?

I asked a lot of people this question and what everyone pointed to was just Shane's own determination. He was so determined that he was going to make this work, working around the clock, tweeting, sending every single thing he put on Twitter or X to all of his investors to try to gain traction, asking them to make bets, making it happen. You know, so I think that's part of it. Another part of it is just branding. They've been, you know, kind of made themselves successful.

sort of the go-to prediction market. They're also available to the whole world rather than just limited to the US as others have been. And then I think they just kind of made it fun. It's very easy to use, even though it's based on crypto, which allows kind of this ease of use. They're not doing some of the know your customer kind of regulatory hurdles that some other platforms do.

which allows you to get on and put your money to work very quickly. And if you're in the US, you do have to use a VPN.

But I think those few decisions and just combined with Stein's own persistency, he's just so passionate about that. And I think you kind of need all those ingredients together. You mentioned that if you're in the US, you do need to use a VPN to use Polymarket. This is important to note, and it's an essential piece of your article, because while Polymarket has seen massive success, it is an illegal operation in the United States and in France and Singapore and Thailand and Belgium.

This is because prediction markets are considered events contracts under U.S. law, so they need to be regulated by the CFTC so that companies that want to offer such contracts have to apply for permission to do that. Polymarket's not done that. Again, your story opens with an arrest of Shane, a raid by the FBI in his house. Polymarket hasn't filed for this license. Why? What is stopping it from doing that? You mentioned regulatory hurdles. That seems like, yes, a hurdle, but a smart one to jump over.

I would agree that that is the most obvious path. I think what happened was when they first started out, they just skipped ahead to it. He was young. He wanted this to kind of put this online as fast as possible and didn't bother to sort of check the laws and go through those regulatory hurdles upfront, thinking that if I just build something, if I build something that's great and then I make it popular and people will love it, then it will all just work out, that people will welcome this.

And that's not exactly what happened, especially under the Biden administration. Prediction markets were very taboo and you have the CFTC cracking down on unregulated platforms like this. And so very early on, within months of their launch, really, they're dealing with an investigation from the CFTC that they eventually have to pay a pretty big fine for, especially for a young startup company.

With that settlement, they basically agreed to not offer to U.S. customers. That sort of closed off that path for the time being. And now I think that they are likely going to reconsider that, especially under the Trump administration, which is, you know, not just friendlier to crypto, but much more friendly to prediction markets as it appears so far. And Trump

Trump could potentially just kind of give them a hall pass, write an executive order, all prediction markets are legal now, you know, something like that, which would give them an even faster shortcut. Or, you know, they're going to have to work with their lawyers, of whom they have a lot, and find a regulatory path, whether it's through that application or, you know, kind of trying to overturn the CFTC settlement.

A key question that you raise is like whether or not this illegality even matters, as you mentioned, OK, Trump could give them a hall pass. You've been in this story for a while now. Do you want to take a 50-50 bet on how this plays out over the next 12 months? Do you have a prediction? Will polymarket become legal in the U.S. or will they just kind of keep moving forward as is?

I do. And I asked all of my sources this question as well. And by and large, everyone gave it above a 50% chance that they would become legal in the next year or two. I think, yeah, like the next year to 18 months, I have a feeling they will be legal. As part of the story, I actually went on, used a VPN and illegally traded on Polymarket, very, very small amounts.

But it doesn't feel meaningfully different to me than trading on Robinhood, where you can also, you know, buy extremely risky stocks or anything, you know, I'm policing bets on who's going to win the Oscars, who's going to win the Super Bowl, you know, or what's Trump going to do next? What's Elon Musk going to write on X or how many times is he going to post? It's kind of silly things that, you know, sure, if you want to lose your money that way, like I don't really see

the harm in doing it. You could make money, but I don't really see a reason for it to be less legal than all the other forms of risky but legal trading that we already have. Yeah, yeah. Fair point for sure. Another prediction market that does exist legally in the US is Kalshi. They exist without crypto though, whereas PolyMarket, you can solely use crypto to make bets there.

What is the fascination with crypto? I know Shane has a long history with Ethereum, but why limit yourselves to just crypto? Why do they like to stay in that lane?

I think they've built their whole system on top of blockchain, which allows for these bets to settle on the blockchain. And so they're using actually smart contracts, which gives in some ways the outcomes of these bets an objective referee, if that makes sense, where it's not so subjective. They set the rules and these smart contracts are just going to settle the way that they are. All the bets are also placed in crypto because it allows people this anonymity that they're

then, you know, kind of makes them more likely or less afraid of betting on their beliefs because they can do it without kind of fear of people, you know, finding this out. Some of the other platforms have similar formats, but...

I think, you know, this was a way to open it up to the world very quickly, you know, and kind of, you know, skirt the regulations that also come with using dollars. And PolyMarket's not actually handling any of the money because it's all just settled through smart contracts. So they don't actually have to be the bank. And Shane, it speaks to his strengths as well, because he was early in Ethereum and became very passionate about crypto, you know, while he was basically still in high school.

You paint this picture of Shane early in his 20s. So it's around 2016. And at that time, he's running pretty deep in the crypto crowd. But at some point through that, he grows relatively disillusioned with that scene. You write that he, quote, became unimpressed with what he calls the Build-A-Bear lineup of copycat startups and crypto scams. That's his wording, scams. You spent a lot of time with him. How now does he distinguish between the scammy side of crypto and what he might deem to be the more righteous side of it?

Yeah. So one of the most ironic parts about Shane is that despite running a platform that's technically illegal and having had to deal with the regulatory consequences of that, he sees himself as the good guy, as, you know, the person who's built a platform that should be legal, that's useful, that's popular, that, you know, people really love. And he's providing an important service in the landscape of news and information, whereas

In the past, he saw, you know, people who are basically less hardworking than himself take a lot of money, but not follow through on actually building it or build a sort of wonky platform that wasn't that great or wasn't good enough to gain mainstream attention. And what they built didn't match up to what they promised. And Shane, who, you know, talks a huge game, like this guy, he's just, you know, his ambitions are off the charts. He really believes that he's going to make it happen. And he swears he's not going to stop until he does. So I think

he's raised a large amount of venture capital and he just believes in himself to the point where you know i'm going to just do this i'm going to build this until it's legal it's going to be you know something that's as useful as the other technology that we rely upon i mean he's a big fan of uber and apple and these kind of meta and facebook he's admired these ceos and entrepreneurs for a long time and he really sees himself as you know one of those kind of big tech giants as opposed to

These anonymous crypto scammers who don't even use their real name, even as they're raising money and trying to build stuff. He puts himself in a different category.

As always, people on the program may have interests 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. All personal finance content follows Motley Fool editorial standards and are not approved by advertisers. The Motley Fool only picks products that it would personally recommend to friends like you. I'm Ricky Mulvey. Thanks for listening. We'll be back on Monday.