Why Investors Are Placing Bets on Wildfires, Wars, and Elections
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Here's your Money Briefing for Wednesday, February 5th. I'm Arianna Aspuru for The Wall Street Journal. The platforms that let users bet millions on the outcome of the 2024 election are offering contracts based on major events like the Los Angeles wildfires. Prediction markets are now testing the limits of what they can get away with.

Day will offer you a chance to bet on economic policies. Is the Fed going to cut interest rates? Or who is Trump going to appoint to such and such a cabinet position? Will that person get confirmed by the Senate? There is also pop culture markets. For instance, you can bet on the Oscars. We'll talk with Wall Street Journal reporter Alexander Osipovich about what you should know before placing a bet after the break. ♪

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The line between sports betting and financial markets is becoming increasingly blurred with the growth of prediction markets. Wall Street Journal reporter Alexander Osipovich joins me. Alexander, prediction markets have surged in popularity last year with the presidential election, but just how popular were they? They're still much smaller than general trading in the stock or options market, but they are growing. They have a tendency to get a lot of

attention during elections. In particular, there's this one big offshore crypto-based prediction market platform called PolyMarket that was doing billions of dollars in monthly volume during the election. In the month of November, it was more than $2.5 billion. And that's a lot of turnover. We had a very unique election where President Biden dropped out.

and then turned into this horse race with Kamala Harris and Donald Trump. Generally speaking, if you follow the mainstream media, they were referencing the odds on Polymarket. And later on after Kalshi, a US-based platform, started election betting, that got some press attention as well, which offers a lot of bets in a sort of like a

The polymarket light isn't quite as aggressive about some of the contracts it lists. And it just became a bigger part of the public conversation. What makes prediction markets different from something like sports betting on FanDuel? Prediction markets are federally regulated and they're accessible in all 50 states, whereas traditional gambling is regulated at the state level. And there is still a number of states, the number has shrunk over the years, that ban online betting.

And you can't bet on the Super Bowl in those states. What are these bets offering now to keep people engaged? So all these prediction market platforms do a bunch of other things besides elections. They will offer you a chance to bet on economic policies. Is the Fed going to cut interest rates? Or who is Trump going to appoint to such and such a cabinet position? Will that person get confirmed by the Senate? Yes.

There is also pop culture markets. For instance, you can bet on the Oscars. There's also interest in sports. For a very long time, the prediction markets that were allowed to serve U.S. customers did not offer any kind of sports trades because it was seen as being illegal. We've also seen things that seem like they're right out of the headline that you can bet on.

What are some of the more like out there bets you can make on these platforms? There are also some edgy bets that have, you know, drawn controversy. Polymarket, because it's offshore and has this crypto bro audience, is often pushing the envelopes of good taste. They had a lot of bets on the wars in the Middle East between Israel and Hamas and Israel and Lebanon. You could...

bet on whether Israel would invade or not, or whether there would be a strike against Iran and so on. During the LA wildfires, Polly Market came under some criticism for allowing betting contracts on the spread of the wildfires, when they would be contained, if they would reach certain places. There were critics who thought that was basically ghoulish, betting on death, right? Polly Market said that essentially this is a

subject of interest to the general public and our platform produces predictions, probabilities, and it moves in real time their social value to this and they use that to justify their wildfire markets. Let's take a step back and go through how these bets work. Prediction markets are basically exchanges for betting on future events. And typically what they offer you is a yes or no question that you can bet on in

If you are right, at the end of the day, you get $1 for each contract that you buy. If you got it wrong, you get $0.

Between the beginning, whenever that contract is listed, and when ultimately you have a resolution, the price will fluctuate roughly between $0 and $1. And the price of that in cents is basically the probability that the market assigns to it. So if traders generally think that something is going to happen, they might price the contract at $0.70, and that reflects a 70% probability. How much are these companies being regulated? $0.00

The ones that are in the U.S., such as CalSheet and ForecastX and Nadex, are regulated by the Commodity Futures Trading Commission, which imposes some rules and standards, provides licenses, but generally speaking is a weaker regulator than some of the other regulators out there like the SEC, the Securities and Exchange Commission. For instance, if one of these platforms wants to list a contract, the process at the CFTC is something called self-certification, where basically the platform just says, we believe this contract

contract is compliant with the rules, we're going to list it. And one business day goes by and then it gets listed and the CFTC

has limited tools in stopping it. In general, we're in the state right now where the U.S.-based prediction markets are testing the limits of what they're allowed to list, given that there's a new administration coming in and Trump has basically promised a kind of light-touch financial regulation. Are prediction markets considered gambling? They would argue that it's trading rather than gambling. But increasingly, as these prediction markets have pushed into areas like sports, it's

hard to distinguish what they offer from gambling. One difference is that generally when you are betting with a traditional sports book, there is a house that you're betting against. You go in and you place a bet. The house gives you certain odds. Whereas in the world of prediction markets, you are betting against other traders. It remains to be seen how different this world is going to be than traditional sports betting. I think we'll find out as these markets grow.

That's WSJ reporter Alexander Osipovich. And that's it for your Money Briefing. This episode was produced by Jess Jupiter with supervising producer Melanie Roy. I'm Mariana Aspuru for The Wall Street Journal. Thanks for listening.