Prediction markets are basking in their election win. Can it last?
Summary
History suggests the platforms have flourished during U.S. presidential elections, then struggled afterward.
Prediction markets passed a closely watched test by correctly forecasting that Donald Trump would win the election. Their future is more difficult to predict.
History shows that prediction markets—betting platforms where people wager on the likelihood of future events—have flourished during U.S. presidential elections, then struggled afterward.
“They’ve all followed this cycle of overexcitement during the election phase, and then a crumbling realization that elections are their one big thing," said Nigel Eccles, a co-founder of online-betting company FanDuel as well as Hubdub, a prediction market that closed in 2010.
That points to a looming challenge for platforms such as Polymarket, an offshore crypto-based prediction market, and U.S.-based Kalshi and ForecastEx. Such platforms offer bets tied to topics like popular culture, weather and economics, but those categories are far less popular for prediction-market bettors than elections.
For the moment, fans of prediction markets are celebrating. Based on an idea conceived by economists in the 1980s—that harnessing the wisdom of the crowd could lead to accurate forecasts of the future—prediction markets have finally shown signs of going mainstream. That is largely thanks to the tense race between Trump and Vice President Kamala Harris, as well as a recent federal court ruling that legalized U.S. election betting.
In recent weeks, individual investors thumbed open the Robinhood app on their phones to bet on the presidential election on ForecastEx, while mystery traders placed huge, multimillion-dollar bets on Polymarket.
Kalshi—a startup funded by Silicon Valley venture-investor giant Sequoia Capital and brokerage pioneer Charles R. “Chuck" Schwab, among others—said its users traded more than $500 million this week, up from about $45 million in mid-October. Polymarket, whose investors include tech billionaire Peter Thiel, hit record daily trade volume as election results rolled in.
Backers of prediction markets hailed their success in forecasting Trump’s victory. Kalshi and Polymarket showed Trump with a more than 60% chance of winning in late October, at a time when poll-based models deemed the race a tossup.
“From my perspective, polls pretty much failed," said Koleman Strumpf, a professor at Wake Forest University who has studied prediction markets. “These markets will be a more central part of the discussion on who’s going to win."
Still, prediction markets have gotten it wrong in some past elections. And questions linger about how they might affect future political contests.
Polymarket, the biggest of the platforms by volume, is unregulated and has faced allegations that it is prone to manipulation. It drew widespread attention in October after the emergence of a “Trump whale" who used four accounts to bet more than $30 million on the former president, single-handedly lifting his odds of victory on Polymarket. The episode demonstrated that such markets are still sufficiently small that they can be pushed around by one big trader.
Polymarket is off-limits to U.S. users under the terms of a 2022 settlement with the Commodity Futures Trading Commission. Kalshi and ForecastEx remain relatively young and untested, with volumes far smaller than those in stock or future markets.
Julian Petroulas was among the heavy-hitters to wade into prediction markets in the days before the election. A 32-year-old Australian entrepreneur and investor based in Dubai, he bet $1 million on a Trump victory. In a YouTube video discussing his bet on Polymarket, Petroulas said the wager was both a political statement in support of Trump and a calculated decision aimed at making a profit.
“From every single metric I can see over the course of the last few weeks, Trump is leading everywhere," Petroulas said in the Oct. 30 video.
Petroulas booked a profit of about $684,000 on his wager, Polymarket data show.
Thomas Peterffy, the founder and chairman of Interactive Brokers, said it is important not to conflate polling with the forecasts generated by prediction markets. Polls attempt to measure the share of voters who will vote for a particular candidate. Prediction markets interpret that signal, among others, to come up with a probabilistic forecast of who will win the election. Sometimes small changes in polling can lead to sharp moves in prediction markets.
“A small edge in the polls could translate to a big jump in probability," Peterffy said. “It’s not the same thing."
Peterffy said he expects prediction markets to keep growing and compared them with the U.S. options market, which has steadily attracted rookie investors since its inception decades ago.Kalshi co-founder and CEO TarekMansour said election markets have had a “massive marketing moment" and that the platform is adding new markets and industry partners.
Ben, a 39-year-old paralegal in Washington, D.C., was among this year’s newcomers to election betting. A Harris supporter, he used Kalshi to wager on a Trump victory, describing it as an “emotional hedge"—a sports-betting strategy where one bets against their favored team to offset disappointment from a potential loss.
He spent $1,200 on several election-related betting contracts, which climbed in value to $1,700 after the results came out. He plans to apply his winnings toward a vacation in January, so he can be out of town during Trump’s inauguration.
Ben declined to give his last name, citing his employer’s desire to stay out of politics. He said the winning bet offered some consolation as Tuesday night’s results showed Harris losing.
“Still a bitter pill to swallow, but at least I’ll have a nice trip to look forward to," he said.
Write to Alexander Osipovich at alexo@wsj.com and Gunjan Banerji at gunjan.banerji@wsj.com
