How many times will the author write “gambling” in this article?

How many times will the author write “gambling” in this article?

This question is not open for “prediction” on neither Polymarket nor Kalshi, the two most popular platforms for prediction markets. But it could be. Just like virtually anything, ranging from when world powers will strike foreign countries to what will be the date of Taylor Swift’s wedding.

Prediction markets are essentially financial platforms in which users are allowed to trade contracts that pay out depending on the outcome of future events. These contracts function as binary answers of “Yes” or “No” to specific questions, with their price floating alongside the bets of fellow participants. What started in 1988 as an experiment, conducted by three economists at the University of Iowa, is now a rapidly growing phenomenon. At the time, the Commodity Futures Trading Commission (CFTC) kept the project on a tight leash to prevent these markets from straying from purely academic purposes. Nowadays, [FM2] those leashes have snapped, with $4.3bn being wagered in these markets in the last week of January alone.

While some of the enthusiasm stems solely from the possibility of betting on whether Donald Trump will say the word “golf” in the following week, the underlying mechanism reflects a more serious purpose. Prediction markets were created as information aggregators, intended to measure real-time expectations. Traditional polls only provide a snapshot, often stale by the time of publishing, with no guarantee that respondents are honest. These markets, on the other hand, further empower the so-called “wisdom of the crowds”. They operate on the principle that a combination of tiny fragments of information, sourced from a diverse group of individuals, can produce a more accurate prediction than any single expert.

By allowing people to put their money where their convictions are, prediction markets create an incentive for truthful answering,  with the resulting forecasts being difficult to ignore.  A paper from the National Bureau of Economic Research has shown that the “crowds” on Kalshi are, on average, as accurate as professional forecasters at predicting a series of economic indicators. In fact, they have maintained a perfect record regarding every Federal Reserve interest rate decision since 2022. For the rate of inflation, prediction markets have even provided significant improvements over the traditional benchmarks.

What makes these markets so accurate is also what raises questions about their legitimacy. The same monetary incentive that drives efficiency also creates fertile ground for wrongful behaviour. In recent months, the outstanding “wisdom” of some participants has become conspicuously evident. In January, a recently opened Polymarket account turned $32,537 into more than $436,000 by betting on the ouster of Nicolas Maduro, just hours before the announcement of his capture. On the same platform, twelve other freshly created accounts wagered a combined $66,993 on a US strike against Iran, with half of those bets being placed in the six hours prior to the attack on February 28th. Moreover, several military reservists have been arrested in Israel due to suspected trading on classified information regarding military operations.

Different approaches to this matter separate the two industry’s leading players. While Kalshi operates as a “designated contract market” under CFTC oversight, complying with regulatory procedures, Polymarket still allows users to trade via cryptocurrency wallets without requiring identity verification. Despite the latter being restricted in many countries, this barrier has proven to be easily bypassed with a VPN, and the company continues to rely on the “goodwill” of its users to comply with local legislation.

Alongside these regulatory concerns, low liquidity remains another structural hurdle for prediction markets. When there are few participants, a single large trade can still manipulate contract prices and, thus, jeopardize the market’s predictive power.

So, up to this point, the answer to the title question is zero. Not because prediction markets are not, in many ways, a form of gambling. They are. The difference lies not in their nature, but in their potential. These markets have proven they can produce genuinely useful information. Whether they will mature into trusted forecasting instruments or remain a glorified casino with unusual markets will now depend less on the “wisdom of the crowds” and more on the willingness of regulators to design a proper framework. And on their ability to enforce it.