Prediction markets look an awful lot like online betting

The question of which regulator can regulate Kalshi and Polymarket appears to be heading to the Supreme Court. But the real question that needs to be answered is, what exactly are these platforms? Entertainment, or investing?

Understanding the answer to that question is critical to banks being able to best serve the people doing their investing, or finding entertainment, on those sites.

Last week, the 9th U.S. Circuit Court of Appeals ruled that Nevada can block the use of event contracts on sporting events, our Maria Volkova reported. The defendant in that case was Kalshi. Moreover, the ruling was the polar opposite of one in a case before the 3rd U.S. Circuit Court of Appeals, which determined that New Jersey could not in fact block Kalshi.

Two different courts, two diametrically opposed rulings. The only solution is to kick it up to the Supreme Court. Now, I am not going to sit here and tell you I have any idea how the Supreme Court will view this. What I am going to sit here and tell you is that the question really is pretty simple: what are these platforms?

Kalshi and Polymarket make the argument that their platforms are a type of derivatives market, which is why they use the made-up "prediction market" moniker. You can see it in the purposeful use of certain terms in their ads. They talk about "trading" in their ads, not betting or wagering. And what they want ultimately is to have their businesses regulated by an agency that regulates derivatives markets: the Commodities Futures Trading Commission. The CFTC wants this, too, and has been aggressively angling for it.

But are they? Are Kalshi and Polymarket trading platforms?

A couple of weeks ago I said these sites are not set up like a traditional "house," even though they get virtually all of their revenue from sports betting, and that is where the regulatory confusion is coming from. And that's looking at it from a mainly top-down view. But a Bank of America report that just came out looks at it from a bottom-up view – as in, who's actually using these sites. This isn't a survey, this information is based on BofA customer-account data. It paints a pretty clear picture.

It should not come as much of a surprise that the most active users come from the Gen Z and Millennial cohorts, Bank of America reports. It might be a bit more surprising that while online betting is fairly evenly split between income groups, lower-income households represent a slightly higher share of online betting (BofA calls it online betting but makes clear their analysis excludes traditional gambling sites). And the active ones are active. A quarter are on there monthly. A third weekly. And 23% are on there daily. And that activity is heavily skewed to the sports calendar. 

The most eyebrow-raising find though was this: In every month from January to July, the period of time they based the report on, the money going into users' accounts from prediction markets was only about 75% of the money going out of users' accounts to prediction markets. In other words, people were losing money on those sites, every month (BofA did say it's possible its data isn't accounting for winnings people leave on Kalshi or Polymarket). Moreover, the median deposit account balance of households that did online betting was only about 60% of households that did not. 

The odds, in other words, are not in your favor.

Those findings dovetail with reporting on the rise of betting in the U.S. in general, since the Supreme Court overturned a federal ban on sports betting. Researchers earlier this year concluded that online sports betting crowded out investing and saving, leaving people generally poorer, and its use was more prevalent the further down the income ladder you looked.

The only effective difference between Kalshi and Polymarket and DraftKings and FanDuel, really, is the physical structure of the bet. The CFTC thinks that matters. State regulators do not. We'll see what the Supreme Court says, or maybe even Congress after the midterms. But that doesn't sound like investing to me.