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On Calian Poly Market, you can bet on when the Straight of Hormuz opens back up, the price of Bitcoin at 11:00 a.m. sharp, or whether the US government confirms the existence of alien life. Production markets are still getting a ton of hype. So much so that Kelshi is valued at more than $20 billion and Poly Market at $9 billion. But how do prediction markets actually work? And can they survive a high stakes legal battle that is likely to reach the Supreme Court? Koshi is fully regulated in the US while Poly Market's main platform operates offshore so it can offer more types of contracts. But the way trading works on each platform is pretty much the same.
You can lose all your money and go to zero or if you place a right bet, you could potentially make a lot of money. The basic thing that you can trade on a prediction market is called an event contract. It's based on a yes or no question around some future event. Will a certain candidate win a certain election? Will a certain sports team win the championship? And the way it's constructed is that if you were right, you get $1. If you are wrong, you get $0. The price of an event contract trades between 0 and $1. It goes up if people think that the event is more likely to happen. It goes down if people think the event is less likely to happen. So that price actually corresponds to a
probability. In the US, event contracts are considered swaps which are a type of financial instrument regulated by the commodity futures trading commission. The CFTC also regulates commodity futures. So for instance, futures on wheat or gold or crude oil. However, for Keli, the most common type of event contract they offer is sports. It has surged to over 70% of its trading volume. We're looking at the under. So, we'd pick no. And the 2,000 on that pays out $760. And then bam.
This is Frank Satlo, a professional sports better in Las Vegas. So, I first heard about the prediction markets, I'd say probably about 7 months ago. And I've transitioned literally from most of every sports book to Koshi because they offer the best way to get the most money down. He says he uses Kelshi because they haven't banned or limited the size of his bets like casinos or gambling apps. Sports books are notorious for kicking out professional bers who are too successful. Prediction markets don't do that. They are mostly interested in having a lot of trading volume because they make money every time somebody buys
and sells a contract. They collect a little cut from it. So they want volume. They want more customers. They want more usage. Khi has run several ads highlighting what it sees as its main difference from sports books, saying, "We aren't the house." What complicates Khi's argument a little bit is that Khi has an internal trading arm called Kalshi Trading LLC. This is a little bit controversial in some quarters because it means that you kind of are trading against the house when you go to Kalshi.
Kelshi Trading LLC is what's known as a market maker, one of several on the platform. And it's these market makers that help bring in liquidity to the platform and set the price for each contract. Prediction markets, like other exchanges, encourage market makers to post orders. Uh often they will pay rebates or give them a discount on uh the fees they charge. Khi says institutional market makers are industry standard and make up 7% of the platform's volume or lower. Most of it is actually individuals or very small funds that's pretty much started for prediction markets that start you know trading and making a lot
of money. On Keli, a spokesperson said there are nearly three unprofitable users for every one profitable user. A journal analysis of 1.6 million Poly Market accounts found that losers vastly outnumber the winners. About onetenth of a percent of accounts take the majority of winnings. A Poly Market spokesperson said in response to the journal's reporting that more than 90% of the Poly Market audience engages with the platform as an information market and for those who trade, the median loss is under $10. For years, US regulators imposed strict limits on prediction markets, keeping them from taking off. But that began to change after Kelshi won a license in 2020 from the CFTC. The prediction
markets have really moved fast and broken things. The biggest uncertainty around prediction markets right now is whether they will continue to be allowed to offer sports betting. When the two sites began incorporating sports betting, that sparked a fierce legal battle with the states. 39 states and DC have legalized sports gambling so far. 31 of them allow online sports betting after a 2018 Supreme Court decision overturned a federal ban. Nevada has become a key battleground state over whether prediction platforms like Kelshi should be forced to get a gambling state license. A May report from a gambling research firm estimates that about 69% of Kshi's volume came
from 19 states that have not legalized online sports betting. There's also scrutiny from Congress. Senators from California and Utah, where sports betting is not legal, introduced a bipartisan bill to ban it on prediction markets. In California, we don't allow sports betting. Uh, it ought to be up to the states to decide what kind of gambling goes on within their state. If it acts like gambling, if it's talks like gambling, it is gambling, right? But prediction markets do have a friendly face in President Trump's son. Don Jr. is an adviser to both Khi and Poly Market. The head of the CFTC, who was appointed by President Trump, has said it has exclusive regulatory authority when it comes to derivatives on a designated contract market.
To those who seek to challenge our authority in this space, let me be clear. We will see you in court. The CFTC is a pretty small agency and it is quite new at grappling with this whole phenomenon of event contracts and prediction markets. So we take this responsibility very seriously to police fraud, insider trading and manipulation in the markets and we are defending that authority in court. Kelshi has said that it bans insider trading and has taken steps to monitor it on its platform. We usually try to see like the m like the where the information would probably be shared and try to ban all of them.
Poly markets international platform has drawn scrutiny for alleged insider trading on some markets. A special forces soldier has been charged for making more than $400,000 by betting on whether or not Venezuelan President Nicholas Maduro would be removed from office. Poly Market has updated its rules on insider trading, making it clear that it's a violation of their rules to trade on stolen confidential information, illegal tips, or if you can influence the outcome. Earlier this year, Poly Market also rolled out a CFTC compliant platform in the US. We've had kind of a free-for-all recently, and I think it is very possible that we are beginning to see the pendulum swing back so that the prediction markets face more
restrictions. There will likely be more prosecutions of insider trading, more rules, more clear delineations of what is allowed and what is not allowed to bet on through prediction markets.
