You'd have to be living under a rock to have missed the influx of advertisements for Polymarket ad Kalshi. Seeing ads and actually understanding what they are isn't the same thing. The Super Bowl is sure to attract even more attention to these wagers, so now is as good a time as ever to take a quick course.
Put simply, prediction markets are the newest entry to the sports betting phenomenon...except they're not just for sports and they operate like trades on the stock market.
What are prediction markets and how do they work?
Prediction markets allow you to trade on the probability of events either happening or not happening. They allow you to place something similar to a prop bet on a variety of events. You do that by buying a contract that pays out $1. If you buy one contract on "yes" at 50 cents and the yes hits, then you win 50 cents on top of the 50 cents you put in.
A simple example is buying a contract saying "yes, Jaxon Smith-Njigba will score a touchdown in the Super Bowl." But that's similar to a bet you can make through a sports book. With a prediction market, you can also wager on whether Ben Affleck will be at the game. Or whether a Super Bowl announcer will say words like "What a catch" or "Turf."
And it doesn't stop with sports. This extends to major world events and miniscule local conditions. Will Ali Khamenei be ousted as Iran's Supreme Leader before July 1? $17 million has been traded on that question. Will the temperature in Los Angeles today be below 74 degrees? Nearly half a million was wagered on that. Will Coca-Cola's next earnings call include the term "cane sugar"? Will a major meteor strike hit Earth before 2030? These are all things currently being traded on Kalshi.
How are prediction markets different from traditional sports gambling?
When you gamble through a bookmaker, you're betting against the house. Oddsmakers set a line. You put your money on one side of it along with a whole bunch of other people. If you're right, you get a payout. If you're wrong, you lose your money, which the house keeps. Drake knows a thing or two about losing money that way.
Prediction markets are different. You're not betting against the house. You're trading shares in "yes" or "no" against other people.
Here's an example:
The contract is "Does the Super Bowl go to overtime?" You can put money on yes or no. The price of a yes or no is based on probability. Buying "yes" may cost you 10 cents. Buying "no" may cost you 90 cents.
Obviously, if the game goes to overtime, the yeses win and the nos lose. But this is where a significant difference between traditional betting and playing a prediction market works. You can sell your contract before the result is finalized.
Let's say you bought "yes, the game will go to overtime" for 10 cents. The market for that contract will continue to move throughout the game. In the fourth quarter, the cost of a "yes" is now up to 75 cents because the teams are locked in a tie. You can sell your 10-cent bet for the 75 cents currently on offer and make 65 cents regardless of the outcome.
On the other side, someone who bought the "no, the game will not go to overtime" contract can see the writing on the wall and sell their 90-cent contract back for the 25 cents on offer. They're able to alleviate their loss.
What are the dangers of prediction markets?
It should be obvious by now. Prediction markets can be centered on things that people with insider information can control. Will Ben Afleck be at the Super Bowl? I sure couldn't say, but his brother could call him up and find out and then make some money off that knowledge.
Athletes could do that too. There's a reason so many people are uncomfortable with Giannis Antetokounmpo announcing shares in Kalshi. Giannis trade rumors are the subject of prediction market bets. Who better to fan those flames than the man himself, funneling users to the very company he has a stake in.
Gambling is already a crippling addiction and these markets may only exacerbate that with the variety and specificity of wagers they offer. That's doubly so when you consider that oddsmakers aren't setting a line based on intricate factors. They're called oddsmakers for a reason. Prediction market contracts are controlled by the crowd. It wouldn't take much for people who simply know a lot about a topic to take advantage of people with limited knowledge but a desire to wager.