Prediction Markets: Who Really Wins and Why It Is Not Gambling

There is a difference between Prediction markets and Gambling platforms. The first has begun to turn serious global events into financial value propositions. The latter remains committed to offering high-end entertainment in exchange for wagers. Fairness is a luxury in Prediction markets, but a non-negotiable in gambling.

There is a lot to unpack about prediction markets. This article aims to establish that activities on these platforms are not gambling because they are unfair and may be a scam.

What are Prediction Markets?

Prediction markets are exchange-traded platforms such as Polymarket and Kalshi, where people can bet on the outcomes of future events by buying and selling shares. Users forecast the occurrence of specific events across sectors such as sports, politics, economics, and entertainment.

Everyone refers to Kalshi and Polymarket as gambling. Kalshi’s own advertising has the phrase “The First Nationwide Legal Sports Betting Platform” which gives the impression that it is a gambling site. When asked about this, both Kalshi and Polymarket say they are not a gambling site, because “gambling is against the house, while their users are trading (playing) against each other while the company is typically charging a fee (a rake) on trades”. But that statement is laughable, since it describes the game of poker perfectly, which is definitely gambling and heavily regulated. It also doesn’t help their argument that a large portion of bets are made on sports. So, are prediction markets gambling or not gambling?

The price of shares mirrors the probability of an event occurring. For example, if shares of a specific event, let’s say Drake playing roulette in Las Vegas, trade at 30 cents, it indicates there is a 30% chance of the event occurring. So, if a user bought into the event with $1,000 at a 30% probability, and it occurs, the user will receive a total of $3,333 at a trade price of $0.30.

Probabilities in prediction markets change as new information becomes available. And users can buy or sell shares to this effect.

The Problem

An academic paper published by researchers at the University of Toronto, ESSEC Business School, and HEC Montréal revealed some interesting facts about Polymarket, the number one prediction market. Since the platform's debut in 2022, 68.8% of users have lost money. Only 1% of traders captured 77% of all gains, with the most significant profits concentrated among 0.1% of users. The simple explanation for these research results is that people who know the outcome in advance are the primary winners, while the rest lose.

The Financial Times has verified this, reporting that while there are more than 2 million users on Polymarket, 2/3 of all money won was held by 740 accounts. In other words, 0.037% of Polymarket accounts won 66.67% of all wagers.

Here is a typical case:

The Department of Justice recently charged a U.S. Army soldier who assisted in the planning of the operation to capture Nicolas Maduro with five felonies. He is alleged to have bet $33,000 on Polymarket that the raid event would occur, based on the classified intelligence available to him, and he won about $400,000.

This isn't the first of its kind. It is, in fact, one of many.

In the final hours of the former president's administration, a Polymarket trader bet on the four specific pardons Joe Biden would issue before leaving office and won approximately $300,000. Coincidence, no! The trader was anonymous.

Trading in Prediction Markets is Not Gambling!

The presence of insider trading in prediction markets is proof that it isn’t gambling. There is no inside information on which slot machine would yield a jackpot or which number a ball would land on when a roulette wheel stops spinning.

Gambling is a highly regulated form of entertainment. There is strict oversight. Games are fair, and even more so when random number generators determine the outcome of gameplay. Owners of a casino cannot play craps, slots, or roulette and win based on any information, because the game outcomes cannot be manipulated.

In prediction markets, political figures can trade on their own campaigns, athletes can trade knowing they would perform a stunt in a game to win bets they placed, and many more. This is neither random nor fair. Because there is no regulation when trading in a prediction market, this cannot be considered gambling. Instead, a high number of winners have insider information while majority of the people who bet on these markets lose, which makes this more like a scam than gambling, and they are getting away with it.

Prediction markets have so far operated in a legal gray area, often avoiding state gambling taxes and age requirements. These are things a legal gambling establishment would not dare.

Final Thoughts

With the increasing impact of social media, prediction markets are growing rapidly, and monthly trading volumes now exceed $20 billion. Young people are actively searching for the right information, following various influencers to bet on various events in hopes of winning big. For some, it is a new side hustle. But the truth is, trading in a prediction market is a risky path, where insider trading has become the order of the day. This isn't gambling and will never be.